All Topics / Help Needed! / Rent or Buy?

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  • Profile photo of joytonyjoytony
    Member
    @joytony
    Join Date: 2005
    Post Count: 13

    I’m a new property fan here, like property investing so much but haven’t started yet.

    However, one question is in front of me now. Rent or buy?

    My situation:
    Deposit: 30k+ in the bank;
    Job income: 65k/year
    Rent Fee:220/week (I live in Melbourne).

    because rental is “dead money”, so i need ur suggestions!
    1.what should i do if i don’t buy? rent & study property invest?[blink]
    2.what should i do if i buy?buy what’s type of property,etc.[cap]

    Profile photo of shake-the-diseaseshake-the-disease
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    @shake-the-disease
    Join Date: 2005
    Post Count: 97

    What does “rent is dead money” mean?
    If rent is “dead” money, then what then is interest on a mortgage?
    What about food to keep you sustained, is that “dead” money too? No I don’t think so.

    You need to question cliches like this.

    Rent money is not dead money, it is the price you pay to have a roof over your head.

    OK so back to the question, how does renting and buying compare. The down side of renting is that you miss out on capital growth. You also miss out on enforced saving, the value of that varies individual to individual. The upside of renting is that it is much cheaper to rent than buy in most areas of Australia.

    So, is the upside better than the downside? Removing emotional factors such as enforced saving, pride of ownership, tenure, this question boils down to numbers.
    CG is the % likely capital gain
    M is the mortgage rate %
    G is the gross yield %
    N is the nett yield %

    Mull over this very simplistic equation:
    1) Owning cost = CG – M – (G – N)
    2) Renting cost = G

    Lets look at a median priced house in Melbourne, the figures look like this:-

    1) Owning cost = 8% – 7% – (3.5% – 2.5%) = 0%. Yes, this means effectively it is free to own a property based on those figures.
    2) Renting cost = 3.5%

    Therefore you should buy.

    Another scenario to explore is continue to rent but buy and rent out a property, that is going to look even better than the pure buy and move in scenario above.

    As for what to buy; here’s another cliché that has more than a little element of truth in it “Land appreciates, buildings depreciate”.

    Profile photo of gafamagafama
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    @gafama
    Join Date: 2004
    Post Count: 118

    There are a number of threads on this forum that deal with this question exactly. It’s one that seems to come up a lot.

    I have a friend who was in her late 40’s and had never owned a property. She continued renting in Sydney, and bought her first investment ppty in QLD, (cheaper to buy/better rental return). 12 mths later, she bought her second (also in QLD). Now she’s up to her third and also has just bought a place to live in in Sydney. She (and I) doubt that, had she gone down the owning road first, that she would have gone so far so fast.

    Hope this helps.

    Megan

    http://www.propertyhub.net
    Your Investing and Developing Information Hub.

    Profile photo of foundationfoundation
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    @foundation
    Join Date: 2005
    Post Count: 1,153
    Originally posted by shake-the-disease:

    1) Owning cost = CG – M – (G – N)
    2) Renting cost = G

    Lets look at a median priced house in Melbourne, the figures look like this:-

    1) Owning cost = 8% – 7% – (3.5% – 2.5%) = 0%. Yes, this means effectively it is free to own a property based on those figures.
    2) Renting cost = 3.5%
    Therefore you should buy.

    Actually, the CG figure for Melbourne is not currently 8% pa. Nor was it during 03/04…
    From the REIV:

    Jun 03 – $363k
    Sep 03 – $376k
    Dec 03 – $386k
    Mar 04 – $371k
    Jun 04 – $371k
    Sep 04 – $368k
    Dec 04 – $370k
    Mar 05 – $348k
    Jun 05 – $363k

    So the average capital gain in Melbourne over the last 2 years has been 0%.

    Your equation becomes

    Owning:
    0 – 7 – (3.5 – 2.5) = -8%
    vs
    Renting
    G = 3.5%

    Which is fine, but it doesn’t make any sense. A holding cost of -8% is surely better than 0%? Imagine how much better off you’d be buying a house that dropped in value by 20%![blink]

    Please explain?

    Good post though.
    F.[cowboy2]

    Profile photo of oshenoshen
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    @oshen
    Join Date: 2005
    Post Count: 112
    Profile photo of oshenoshen
    Member
    @oshen
    Join Date: 2005
    Post Count: 112

    No, wait… Buy

    Use the search function to get a bit more background. But invest that 30k immediately in something whether it’s property or not.

    Profile photo of shake-the-diseaseshake-the-disease
    Member
    @shake-the-disease
    Join Date: 2005
    Post Count: 97
    Originally posted by foundation:

    Originally posted by shake-the-disease:

    1) Owning cost = CG – M – (G – N)
    2) Renting cost = G

    Lets look at a median priced house in Melbourne, the figures look like this:-

    1) Owning cost = 8% – 7% – (3.5% – 2.5%) = 0%. Yes, this means effectively it is free to own a property based on those figures.
    2) Renting cost = 3.5%
    Therefore you should buy.

    Actually, the CG figure for Melbourne is not currently 8% pa. Nor was it during 03/04…
    From the REIV:

    Jun 03 – $363k
    Sep 03 – $376k
    Dec 03 – $386k
    Mar 04 – $371k
    Jun 04 – $371k
    Sep 04 – $368k
    Dec 04 – $370k
    Mar 05 – $348k
    Jun 05 – $363k

    So the average capital gain in Melbourne over the last 2 years has been 0%.

    Your equation becomes

    Owning:
    0 – 7 – (3.5 – 2.5) = -8%
    vs
    Renting
    G = 3.5%

    Which is fine, but it doesn’t make any sense. A holding cost of -8% is surely better than 0%? Imagine how much better off you’d be buying a house that dropped in value by 20%![blink]

    Please explain?

    Good post though.
    F.[cowboy2]

    Good pick up, thanks (no sarcasim intended).

    I picked 8% as that is the historic growth, but you are correct that it has been 0% of late, so in fact renting has been better for the last couple of years than buying.

    I agree that me using “Owning cost” is a bit too loose, I should have used “Owning net benefit”. Actually a -ve percentage is a cost, a +ve percentage is a net benefit.

    I also should have stated that the “Rent cost” (rent net benefit) is in fact -3.5% (ie negative), I used the wrong sign in my original example.

    cheers

    Profile photo of shake-the-diseaseshake-the-disease
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    @shake-the-disease
    Join Date: 2005
    Post Count: 97

    Here’s my equation with errors corrected.
    ===========
    Removing emotional factors such as enforced saving, pride of ownership, tenure, this question boils down to numbers.
    CG is the % likely capital gain
    M is the mortgage rate %
    G is the gross yield %
    N is the nett yield %

    Mull over this very simplistic equation:
    1) Owning net benefit = CG – M – (G – N)
    2) Renting net benefit = -G

    Negative figures mean a net cost, positive figures mean a net benefit.

    Lets look at a median priced house in Melbourne, the figures look like this:-

    1) Owning net benefit = 8% – 7% – (3.5% – 2.5%) = 0%. Yes, this means effectively it is free to own a property based on those figures.
    2) Renting cost = -3.5%

    Therefore you should buy (as 0% is greater than -3.5%).

    Profile photo of joytonyjoytony
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    @joytony
    Join Date: 2005
    Post Count: 13

    Firstly, Thanks shake-the-disease,oshen, foundation, gafama so much. especially shake-the-disease.

    From shake-the-disease’s view, generally, i should buy a property now.

    I do some search & find the following words:


    Dazzling
    Valued Forum Contributor [489 posts]
    Posted 03/08/2005, 01:06:53

    Hmmmm, ‘rent is dead money’….

    1. Suggested Solution

    Purchase Price $ 350K
    Purchase Costs $ 18K
    Outlay needed $ 368K
    Deposit $ 100K
    Loan $ 268K (76% LVR…OK)
    Interest rate @ 7%
    NTDD Interest per year = $ 18,760
    Annual Outgoings = $ 2,500

    Total needed per year to fund purchase = $ 21,260

    Ownership ‘dead money’ = $ 409 p.w.
    Rent ‘dead money’ = $ 340 p.w.

    Conclusion ….Keep renting

    2. Alternative (Buy and live in a hovel in Drossville)

    Purchase Price $ 200K
    Purchase Costs $ 10K
    Outlay needed $ 210K
    Deposit $ 100K
    Loan $ 110K (55% LVR…OK)
    Interest rate @ 7%
    NTDD Interest per year = $ 7,700
    Annual Outgoings = $ 1,500

    Total needed per year to fund purchase = $ 9,200

    Ownership ‘dead money’ = $ 177 p.w.
    Rent ‘dead money’ = $ 340 p.w.

    Conclusion ….Buy the hovel

    From where I sit, it looks like it all boils down to your individual lifestyle standards. Just starting out, I set the bar really low, and worked up from there.

    Cheers,

    Dazzling

    “No point having a cake if you can’t eat it.”
    https://www.propertyinvesting.com/forum/topic/18790.html?SearchTerms=plus,1,rent



    From Dazzling’s view,seems i should buy a hovel at first.
    [blush2]

    Profile photo of shake-the-diseaseshake-the-disease
    Member
    @shake-the-disease
    Join Date: 2005
    Post Count: 97

    The example Dazzling gave looks only at cash flow, it doesn’t take into account capital gain. However as I pointed out, the financial benefit of owning a property is the captial gain. That is what my equation tries to take into account.

    BTW, you need to put in your own figures into the equation. What do you think the capital growth will be for the area you selected? What is the gross and nett yield for the property type, and what do you think interest rates will be.

    For example; if you think growth will be only 2%, gross rent 4%, net rent 3% and interest rate 7%, then financially it does not make sense to buy and move in.

    But, and this is a big but, you need to make an assessment on how important to you the non-financial aspects of owning a property are. How important is it to have enforced saving (without it would you just p*** the money away), how important is it for you to have security of tenure, how valuable is it to be able to repaint a room? Only you can tally this up.

    Profile photo of joytonyjoytony
    Member
    @joytony
    Join Date: 2005
    Post Count: 13

    Yes, shake-the-disease, Ur words is absolutely right.[cigar]

    I think i should consider this problem according to the following points:
    1.Problems:
    1.Reason to buy: Want to settle down my business more stable. (I will build some busi at home, but don’t want to move according to the landlord).No other emotional reasons because i think i can control myself to reserve money.[biggrin]
    2.From cash-flow point of view, i can just buy a hovel at first. Property value < 200k. bank repayment < 900/week. (Because i still want to get good cash folw & keep on investing.)

    2.Analysis:
    1.Property type: Less then 200k property in Mel is apartment or unit(far away from city).
    while the capital gain for apartment should be less then 2% in these 2 years i think.[chill]

    3.Solution:
    1.Keep on rent.
    2.Keep on study property investing.& Find bargain

    Any suggestions?[cap]

    Profile photo of oshenoshen
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    @oshen
    Join Date: 2005
    Post Count: 112

    That sounds sensible. Just put away as much cash as you can in the meantime and think about other investments for the time being, like high interest savings accounts and/or shares.

    Profile photo of GPSnetworkGPSnetwork
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    @gpsnetwork
    Join Date: 2005
    Post Count: 313

    Rent & Buy

    Stay renting where you are and buy an investment prop. as this will give you the tax advantage you need to offset your tax paid and starts your investment journey..

    Roy H.
    L.R.E.A., Dip FS (FP)
    Guardian Property Specialists (GPS)
    http://www.gpsnetwork.com.au

    Profile photo of DazzlingDazzling
    Member
    @dazzling
    Join Date: 2005
    Post Count: 1,150

    Hey guys,

    If you are going to quote me, at least try and quote me in context.

    If you care to review the thread you took that piece from, you’ll notice the capital gain aspects of the equation was fully addressed.

    Please don’t quote only half my post and then turn around and say I haven’t addressed the major aspect of an issue, when the other half you didn’t quote addresses it ??

    Thanks guys.

    Cheers,

    Dazzling

    “No point having a cake if you can’t eat it.”

    Profile photo of joytonyjoytony
    Member
    @joytony
    Join Date: 2005
    Post Count: 13

    Thanks oshen,GPSNetwork.[biggrin]

    Sorry Dazzling,[cigar],i did put ur name & the original link on the quote.The reason i quote ur words is because I found ur cashflow analysis is reasonable for me.

    If u don’t like,i will not do it. Sorry about that.

    Profile photo of oshenoshen
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    @oshen
    Join Date: 2005
    Post Count: 112

    Hmmm, Joytony, it seems to me that Dazzling is objecting to you quoting half of his posts, like you just did for the second time in the one thread. It makes it sound like he is saying something that he didn’t intend.

    I don’t know of anyone who would mind being quoted in context. Afterall, imitation is the highest form of flattery (I think that’s how that quote goes [wink]).

    Profile photo of joytonyjoytony
    Member
    @joytony
    Join Date: 2005
    Post Count: 13

    [blush2]yes,oshen,that’s why i put the link there.

    Anyway,sorry about that.

    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
    Post Count: 1,416

    Hey Oshen, Dazzling,

    How about cutting joytony a bit of slack here.

    I checked the link and found the quote on the post was word for word with the link. ie. there was NOTHING left out of Daz’s post – so what the??

    Joytony, relax, you’ve done it good !!! I can’t see any problem with what you’ve done here.

    And Daz, Oshen, let’s not drive new posters away here for no good reason. Or am I missing something here? Keep in mind that I’m reading this as MOST other posters would read it (you might have some other angle that we are not aware of)

    Benny

    Profile photo of clonesclones
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    @clones
    Join Date: 2005
    Post Count: 81
    Originally posted by GPSNetwork:

    Rent & Buy

    Stay renting where you are and buy an investment prop. as this will give you the tax advantage you need to offset your tax paid and starts your investment journey..

    Roy H.
    L.R.E.A., Dip FS (FP)
    Guardian Property Specialists (GPS)
    http://www.gpsnetwork.com.au

    Hi joytony,

    Never ever buy an investment property thinking about tax advantages. Tax advantages mean only one thing, you will loose money.

    WB

    Profile photo of GPSnetworkGPSnetwork
    Member
    @gpsnetwork
    Join Date: 2005
    Post Count: 313

    Clones, you are entitled to your opinion.

    Roy H.
    L.R.E.A., Dip FS (FP)
    Guardian Property Specialists (GPS)
    http://www.gpsnetwork.com.au

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