Rent or Buy?

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”.

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]

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.

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%).

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.

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.

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.”

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]).

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

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