I have recently sold our PPOR, and I thought I'd go back through and see if it was all worth it in the end.
This case is a little unique because I actually purchased it as a sitting tenant, so was already renting. Of course, there's always 'what ifs' but it's probably as close as you'll get for a decent comparison.
Purchase was in February 2006 for the contract price of $346,000. At the time we were renting for $320/wk.
During the period we spent $50,000 on renovations – including tradesmen, materials and components. This included a new kitchen, three new toilets, a full refurbishment on one bathroom and a freshen up of the other, plus new floocoverings, paint, turf, gardens and a million other little things. The property was a 3 bed/2/5 bath townhouse.
We recently sold the property (July 2009) for a contract price of $460,000. While it sounds like a good result on paper, because I keep detailed records, I ran some reports and came up with these results:
Purchasing, Renovating, Holding and Selling Costs
Purchase Costs : $10,683
Renovations : $49,784
Body Corporate : $5,469
Rates : $6,339
Mortgage Interest : $65,103
Sale Costs : $16,363
TOTAL : $153,741Sale Profits are $460,000 (sale price) – $346,000 (purchase) – $153,741 (holding) = -$39,741
So it cost us, in total, $39,741 to live there for 41 months, which, per month, is $969.
Now, if we had stayed renting, I've made the assumption that the cost would have gone up $5/week each year. Because it was strata titled, this is pretty correct as I was able to monitor the rental prices of the other units in the complex.
Year one : $320 x 52 = 16,640
Year two : $325 x 52 = 16,900
Year three : $330 x 52 = 17,160
Year four (5 mths) : $335 x (52 / 12) x 5 = $7,258Total Rent : $57,958, over 41 months, works out to be $1413 per month.
So, in raw terms, we were better off by about $18,000 to purchase, renovate and sell the property.
In subjective terms, it was also better to be in control of the destiny, to be able to renovate to our tastes, and to be able to contribute to the running / management of the strata titled complex. However, renovating is hard work and doesn't count the countless hours put in working, cleaning up, organising tradesmen etc etc.
This case is a definite winner in the buy vs rent debate.
However, a little sensitivity analysis shows how close it can be. The contract price of $460,000 was more than expected, a result of the right buyer finding the right property for them and paying a premium price as a result. Other offers we received were up to $40,000 lower. Any accepted offer $18,000 lower than the sale price would have ended up in favor of renting (in raw money terms). All other offers on the property were actually much more than $18,000 lower, so if it weren't for the happy buyer we would have been behind.
For me, I don't think I'd be happy in rental accomodation unless I could sign a long term (3+ years) lease, and be allowed to make cosmetic improvements to the property. So the subjective side weighs in heavily. However, from an objective point of view, just purchasing a property and believing it's better to buy over renting is not always clear cut, particularly if you hold for a short timeline as we did in this example.
What you haven't factored in would also be removalist costs and lost weekends fighting for a new rental
But if you sold the house after ten or so years it would be a no brainer
Scott : add back in the lost weekends searching for a new place to buy and the removalist problems for that, and it's about even.
devo76 : it's not necessarily a no brainer. Sure, convential wisdom is that it's a no brainer, but I doubt many people really sit down and work it out. For some people, in some situations, it's better to rent, particularly if you can find a place that you like and that has a good owner interested in maintaining the property and keeping the tenant happy.
I've heard banks state that the average life of a home loan is 7 years, which probably means that few people stay in the one location for 10+ years, and lots of people churn in the 3-5 year period, which isn't necessarily a good idea.
It is actually less than that "I have heard the average life of a home loan is 7 Years".
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Did you factor in the cash you came up with for the purchase and any refurbishment and the interest you could have earned on that.
having said that you have done well to be on the positive side of the ledger.
to me this is the same old rent vs buy argument. And on a purely cash outcome it can sway both ways. The decider to me is what you do with the cash saved. Let’s say after 5 years you come out $15,000 ahead if you rent. This would show renting wins. But who actually SAVES AND INVESTS this money. Few do. This is why buying wins in my book.
@crj : no I didn't factor in the interest, that's a good point from a purely financial perspective. I think all told it would have swallowed about $100k in cash during the ownership period. If this was in the bank earning interest, after taxes, there's probably $10,000 there.
If I had rented during this period and put that $100k into, say, a resources index fund during the period (and got out within 10% of the top of the market in 2008) I probably would have made a lot more money than with the buying/renovating. Yes, we did OK but we bought well in the first place, which makes all the difference. The original purchase was $30k below the asking price because the owner needed to sell and couldn't shift it. I waited until the exclusive listing agreement with the agent had finished, and made an offer direct to the owner with no pesky agent to get in the road. Nobody wanted a tenanted property in a poor state of repair (note it was in bad repair before we moved in!) that had languished on the market for 60 days+ The property was in a sought after location, and after we renovated it to a standard consistent with the area and asking price, it sold within 3 days us listing it.
@devo76 : you're spot on. The big winner for the average person is the forced savings of making mortgage payments. However, this doesn't outweigh the fact that too many people dip into their equity as soon as they've built it up. A little discipline goes a long way for both renters and owners.
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