Elliot Watson has been named as a finalist in the ifa Excellence Awards for Practice…
The question of whether to buy or rent is one that haunts many potential first home buyers. Home ownership is engrained in the Australian psyche as the “Great Australian Dream”. Renting, on the other hand, has such renowned negative slogans of “rent money is dead money” or “you’re paying off someone else’s mortgage”. You may be surprised to know that these are not always the correct representations of what renting, or home ownership have to offer. Each has their own pros and cons, and one or the other, or a combination of both will be better suited to you depending on your needs.
Let’s Look At The Advantages Of Buying A Home
It Is A Form Of Enforced Savings
Frankly, very few people are able to do the savings that would be needed to buy a home in ten or fifteen years. When you take on a mortgage, this becomes a kind of enforced savings, albeit you are also paying a considerable amount in interest.
A Home Is An Appreciating Asset
A home is probably the most secure asset you can own. If you have an eye for property price movements, it is likely the home you buy will be more valuable in the future. This is accentuated if you buy in a location that becomes more popular over time, because of external factors such as the building of a new commuter hub.
Freedom To Renovate
When you own a home, you can do with it whatever you want. You can make it your ultimate castle. You do not have to answer to a landlord or worry about those dreaded inspections from the real estate agent.
Peace Of Mind
No one can force you out of a home you own. Even if the government wanted to forcibly acquire the land for national interests, you would be compensated.
Cons Of Buying A Home
Your Money Is Tied Up
Many mortgages typically require a minimum of a 10% deposit. This can run into the hundreds of thousands for many home owners. This is a hefty cash investment. There is an opportunity cost associated with homeownership. Before deciding to invest in a home the question must be asked, what else, where else could I invest this money for a better return?
You Are Fixed
Buying a home essentially means that you have chosen to settle in that area and live there for the foreseeable future. You cannot move without making arrangements to sell or rent out the house. These are things which take time.
Advantages Of Renting A Home
You Can Live Where You Want
In today’s competitive property market, renting can possibly help you live where you want to live, not necessarily just where you can afford to buy a home.
Easier To Relocate
If you want or need to move, you can simply hand in your notice. Renting provides more flexibility.
You Can Invest Elsewhere
Instead of investing a considerable amount in one asset, you can diversify your investment portfolio by renting and investing the money elsewhere. You also have the option of investing in more than one asset which increases the diversification benefits.
Cons Of Renting
You can be forced out of a rented home or rents can be raised if the landlord follows the required procedures. This can create a sense of uncertainty, especially if you have had to move repeatedly. Moving is touted as one of the most stressful things we endure. It also adds costs to renting as each move can be an expensive exercise.
There Are No (Forced) Savings
There are no ‘forced savings’, unlike mortgage payments.
As a tenant there are many restrictions on what can be done to the property you rent. Depending on your rental agreement even mundane home decorations cannot be hooked into the walls without breaking the tenancy agreement.
More people are increasingly opting for a third option when it comes to home ownerships. It is called rent-vesting, where they buy a home but then rent elsewhere. This option provides the unique combination of advantages of both renting and investing. It can enable you to live where you want to live, whilst still having forced savings AND your rental income (if you buy with a good RIO) can be used to supplement your rent.
Whatever you decide is the most suited to your needs the important thing is to put money away for the future. Burning all of your income on “non-appreciating assets” will not help grow your wealth for now and the future.
The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. The views expressed in this publication are solely those of the author; they are not reflective or indicative of licensee’s position, and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author. Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.