Which is better… renting or owning a home?

Date: 12/01/2014

Which is better… renting or owning a home?

Sadly, there’s no definitive answer to this question because ultimately it’s a lifestyle rather than an investing decision. Still, there are many different advantages and disadvantages to renting or owning a home.

The Pros And Cos of Renting And Owning

The pros and cons of buying a home are:

Owning – Advantages

You have stability and won’t need to move unless you choose to.
As the owner you can do what you wish – paint the walls whatever colour you like, or decide on a whim to hang a huge picture on the wall.
You don’t have to answer to a landlord, nor have regular inspections by a complete stranger telling you that the carpets need cleaning.
You benefit from any capital appreciation and it should be tax-free (if it’s your principal place of residence).

Owning – Disadvantages

Borrowing up to hundreds of thousands of dollars is a huge financial obligation that might mean you lock yourself into having to work to afford the repayments.
Owning is generally more expensive than renting, especially when you factor in the cost of paying council rates and repairs.
You can’t call up the financier and ask for a new hot water service when the old one breaks down.
Any wear and tear is ultimately payable by you.

On the other hand, the pros and cons of renting are:

Renting – Advantages

You are not fixed or locked into living in the property for the long-term.
If the stove breaks down, you don’t have to pay to get it fixed.
Established laws, which by the way are more in your favour than they are your landlords, protect your rights.

Renting – Disadvantages

While you are somewhat protected while you have an unexpired lease, you may nevertheless be unlucky and be forced to move. This means that you never really feel like you can put down solid roots in a rental property.
The property never feels like it is yours – mainly because it’s not!
If the market booms and you rent rather than own, then you may find it expensive to buy back in at a later date.
Dealing with rental managers and landlords is never a stress-free experience.

Having said all that, the choice of renting or owning boils down to just two issues:

Issue #1: What can you afford?
Issue #2: What housing situation best suits your lifestyle or current circumstance?

Let’s look at these two issues in more detail.

Affordability

It won’t be the case in all circumstances (such as where you don’t have a huge mortgage, or you can buy an ultra cheap house), but it generally costs more to own rather than rent.

For example, let’s look at the property where my wife and I live at the time of writing. It’s a 2-bedroom unit in Melbourne that we rent for $955 per month.

This unit is probably worth about $300,000, so owning it would mean that we would have to pay loan repayments of $1,686 (80% loan, 7% interest, 300 monthly repayments at beginning) per month, plus the annual rates and ongoing repairs.

What if you can afford it, but…

A lot of people who could afford to own a home still prefer to rent. For some, it’s a choice of living in an area because of their circumstances. On the other hand, for people like my wife and I, we chose to rent and invest what we saved.

In economic terms, the value of the foregone benefit is called the opportunity cost. In the example of the unit above, the opportunity cost is $731 ($1,686 – $955) per month, plus the annual rates, repairs and other costs.

The question then is: ‘What can you do with that $731?’

One option is to spend it paying for lifestyle expenses, but if you do that then you risk being stuck in a rent trap because you’re not saving for a deposit nor keeping in touch with any capital appreciation occurring in the market.

In our case, my wife and I decided to invest in buying positive cashflow real estate under the plan of buying a house to live in at a later date after we’d set ourselves up financially. While we didn’t own our home, we were still buying houses, just for other people to live in.

In fact, even if we didn’t invest in property and rather placed our monthly savings at say 10% per annum into managed funds, then the value of those managed funds after 25 years would be a whopping $1,915,669 (ignoring tax and inflation)!

If you can bypass the emotional issues and have the discipline to save, the end result is that you may be better off financially to rent rather than own.

Life Circumstance

There are many people for whom renting represents a convenience, and as such, it’s a preferred option to owning. Workers on secondment, people new to the area, those who simply don’t want the hassle of owning, people who work long periods overseas, those who want to live a lifestyle now but plan to settle elsewhere later… they’re all examples of people who might be able to afford a new home, but choose the flexibility of renting.

What Should You Do?

The only person who can answer this is you! On pages 269-276 of From 0 to 130 Properties in 3.5 Years I point out that the quickest way to achieve your goals is to follow the path of least resistance.

For my wife and I, this meant that we rented and then invested the money (both the monthly savings and our initial deposit money) into buying investment property. Just be very careful to identify the goal you are trying to achieve, and then follow a plan that will bring you closer to the outcome you desire.

One thing is for certain – there will be a cost to following your dreams. If you have the discipline to delay gratification, such as deferring the decision to own while you invest with a sensible wealth accumulation plan, then you may find that you can arrive at your goal sooner by investing now and then paying for your home out of positive cashflow profits. The alternative is to pay for your repayments out of a salary, which sounds much like the beginnings of the rat race.

Whatever your choice, I wish you the very best of success.

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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.