To rent or buy… that is the question
Buying a property has always been the Great Aussie Dream… so it’s a no-brainer that everyone should buy rather than rent. Right?
Surprisingly, not according to many pundits.
Some argue we’re paying too much for property – that affordability has gone out the renovated sunroom window. Others go further, suggesting we might be in a property bubble and that these high prices will eventually burst. Even the Reserve Bank has weighed into the debate, with a recent RBA study suggesting some households would be better off renting rather than buying.
Let’s look at affordability.
In 1975 my parents bought their first home in Essendon for $25,000. Back then, household debt was around 60% of income. My parents borrowed $12,500, just 50% of the purchase price.
Today, household debt is around 180% of income. And people can borrow over 100% of the purchase price.
Is this just evolution – the price we must pay for living in such a prosperous society? Or have we been so blinded to the alternatives that we solely focus on property regardless of the cost?
You also have to ask – is it sustainable? We’re in a global economy, and many surprising jobs (Accountants!) are now getting off-shored. What happens to the market if too many people lose their jobs and can’t make repayments?
So… is it better to rent or buy?
I’m a huge fan of property. In my book Where’s My Money? I devote two chapters to property, and show how you can own two properties outright before you retire. Provided you take a longer term view, and buy the right type of property in the right area, history shows that property will increase in value over time.
There are other benefits of owning your own home – security (you can’t get moved on by a landlord), and freedom (you can hang a picture on the wall, redecorate the bathroom, have a garden).
On the flip side, there are many instances where it makes sense to rent.
I have many clients who are share traders – they prefer to rent so they can free up working capital that would otherwise be tied up in property.
And while your own home is an asset that will generally appreciate in value, it’s not necessarily an income-producing asset. One option is to rent, and use working capital to purchase one (or more) investment properties which will generate income. This can be attractive if you’re a mobile single or couple, but gets harder when you have a family and you want the security or flexibility that comes from owning your own ‘castle’.
Plus, if you overcommit and borrow more than you can repay, and don’t have preparations in place in case things don’t go to plan (ie you don’t have personal insurance to provide a safety net in case you’re unable to work for an extended period), you may lose out if forced to sell due to the high cost of entering and exiting the property market.
As with any key financial decision, it depends on your unique circumstances. I’m a big advocate for property, but only in the right circumstances.
Remember, however, that life is about more than money. There are many non-financial factors to consider when choosing between renting and buying. It all comes down to cash flow. Don’t get in over your head, and always ensure you protect your most important asset – your ability to keep earning an income.
And always get expert advice to ensure you make the right call for your personal situation.
Jay’s Hot Tip: Top 10 must-do’s when buying property
Choose the right property: growth, return… (tax benefits last priority)
Structure your property purchase – maximum asset protection, tax effectiveness and flexibility
Get a solicitor to review contracts and conveyancing
Get the right finance (could save you thousands)
Protect yourself in case things don’t go to plan – importance of insurance (home, contents, landlords, income protection)
Maximise tax deductions
Tax audit insurance
Consider an SMSF for your next purchase