Investing Advice: Renting VS Buying Your Home

You will almost always get a better financial outcome by renting rather than owning a home, provided you invest your capital and savings (from renting) astutely.

Consider this real life example:

A property apprentice recently asked me to help her quantify which was better: owning or renting.

For $500 she could rent a home of acceptable standard, or for $500,000 she could buy something similar. If she did buy, she wouldn’t have any money left to invest with.

What was needed here was a financial comparison between renting and owning. Here’s what I did:

The cost of renting was easy to calculate: $500 x 52 weeks = $26,000

The cost of owning, assuming she borrowed at an 80% LVR at 6% interest would involved debt servicing, plus ownership costs which would not be payable as a tenant:

Interest: $24,000
Rates: $2,500
Maintenance (1%): $5,000
Insurance: $2,000
Total: $33,500

Furthermore, to buy a home she would need capital of $110,000 (deposit: $500,000 x 20% + plus closing costs (say $10,000)).

Assuming this capital could otherwise be invested in a term deposit earning (after tax) 4%, that’s a further $4,400 foregone by owning rather than renting.

The conclusion:

Rental cost: $26,000
Ownership cost: $37,900

You’re welcome to use this financial comparison methodology with your own variables.

Of course, life decisions cannot always be made on financial grounds alone. There is a certain amount of security and satisfaction that comes from owning your home, and you don’t have the risk of the aggravation that comes from dealing with a pesky or unreasonable landlord.

So, considering all the angles, here’s the advice I’d give my kids if they asked me my thoughts on the matter:

1. Provided you can stomach the aggravation, rent now and sensibly invest your capital with the plan of buying a home from the profits later on.

2. If you want to buy a home first, don’t max out your borrowing and capital, acquire a ‘starter home’ that you can live in for a few years, still invest, and trade up to something better later on.

That’s my opinion. What say you?

– Steve

By Steve McKnight

Steve McKnight, the founder of PropertyInvesting.com, is a respected property investing authority as well as Australia's #1 best-selling business author.