What is not owning your own home actually costing you? Is it better to Rent or Buy?

What is not owning your own home actually costing you? Is it better to Rent or Buy?

Is it better to rent or buy?

What is not owning your own home actually costing you?

Should you build your wealth through your own home or should you rent and buy investment properties?

These are the questions I’ve been trying to wrap my head around for the last month, so I thought I’d share my thoughts and findings after some basic research.

Findings

There can be a financial benefit in owning your own home vs. renting.

Owning your own home comes with a number of financial advantages:

  • Capital gains
  • Tax free income
  • Tax savings

To answer this question I had a play around with a rent vs. buy calculator at yourmortgage.com.

This calculator enabled me to run a number of scenarios, based on the numbers in the table below

Monthly rent paid for accommodation $1800
Property purchase price $430,000
Loan amount $387,000
Mortgage interest rate (current variable rate) 5.3%
Loan period 30 years
Deposit (10%) $43,000
Cost of buying and borrowing $13,000
Quarterly council rates payment $450
Conduct analysis at year (multiple years) 3, 5, 7, 10
Variables Conservative
Annual rent increases 2.5%
Return on invested funds (money invested in the bank) 5%
Yearly appreciation of home (conservative) 6%
Annual home maintenance $2000

 What were the results?

As you can see below there can be financial benefit in owning your own home vs. renting. Based on the numbers above you would be $50,000+ better off in 3 years if you bought your own home, rather than continuing to rent, save your money and invest in at a modest 5% return.

Years from today Financial benefit in owning your own property vs. renting
3 $53,333
5 $107,794
7 $171,755
10 $288, 351

Have a play around with the rent vs. buy calculator, which will enable you to model your own situation.

What about lifestyle?

I hear you generation Y! We want lifestyle and we want it now!

A work college of mine told me today that she had just been approved $30,000 for a new car today.

I stupidly made the mistake of questioning why she would buy a new car when she didn’t own any property? Followed by the following questions.

1. How much deposit would she need to buy the house she had just found for $320,000?

  • 5% of $320,000 = $16,000
  • Closing costs = $7,000, with the other closing costs being added to the loan

2. How much would it cost her per week to own the property?

  • $310,000 x 0.489% (current fixed, interest only, rate with NAB for 2 years) = $15,159 or $291 a week (+ the normal costs of owning a property – council rates, water, electricity, insurance, maintenance, etc)

3. How much better off would she be in 5 years, using the Rent vs. buy calculator?

  • $34,000+ better off
  • $164,000+ in equity in her home which would allow her to buy the car and another property in 5 years time without saving a cent

Im sure she will end up buying the car, but it was interesting to have a play around with the numbers and imagine where todays decision leave us in 5 years time.

The information provided in this blog is of a general nature only and in no way constitutes legal or professional advice, or specific advice in relation to any finance. In all cases we recommend you receive professional financial advice for your own personal circumstances.

Ben Everingham

About

Ben founded Pumped On Property after building a multi-million dollar property portfolio over a 5 year period. His mission is to show you how to replace your income through property investing so you can do what you love…full time.

2 thoughts on “What is not owning your own home actually costing you? Is it better to Rent or Buy?

  1. Ben, one thing that most people don’t weigh up is the opportunity cost or the opportunity benefit. Property is probably the 2nd hardest asset to liquidate, second to superannuation if you are under 65. So that 65k you just saved and put into a deposit and closing costs is locked in your house reducing the opportunity you have to make other investments such as in a business, shares or precious metals such as gold. So if you continue to rent you give yourself the opportunity to be flexible and responsive to best available and more liquid assets. Just the other side of the coin to consider.

    1. Hi Ken.
      You are completely right.
      There are significant and highly profitable opportunities outside the property market. For savvy investors having the flexibility and liquidity to pursue external opportunities can be a great strategy.
      The numbers I have modelled in this blog are based on the average Australian who is currently generating a 5% return through a term deposit. If an investor has the ability to consistently invest in markets where they generate a 8 – 15%+ annual return then the numbers change dramatically to the point where owning your own home is questionable. For the average Australian who has the mentality to spend more than they save owning their own home may enable them to get ahead faster than doing nothing at all.

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