Is It Smart to Buy or Rent Your Home?
By Hitesh Mohanlal
There is a myth that says buying a home is the be all and end all.
In my mid 20’s everyone told me I had to buy a home so I had to have the difficult conversation with the lady of the house to tell her she had to cut down on the high heels so we could squirrel away a deposit. This did not go down well with her.
When the deposit was squirreled, we ended up with a mortgage which meant I had to now tell the lady of the house that handbags needed to go too. There is only so much a woman can take so this inevitably resulted in a monumental war. Which I lost. Obviously.
Anyway, back in those days it made sense. We were taught to buy, work your butts off and if that meant your starved for a while so be it. And because everyone did it, it was considered normal. Avo on toast had not been created back then so we were never enticed.
We ended up being debt free before the age of 40 and I still refuse to borrow on my home. It is my safety net. Pretty dumb too because I could leverage it to create more wealth, but this is the line I have decided to draw.
Even up to about 8 years ago you could make it work and buying a home was a non brainer. Ros my business partner is a prime example. She will be debt free by the time she is in her early 40’s.
But in today’s market does it make sense to buy a home when a tiny shoebox of a place can cost you a billion or two?
Most will say it does. We have all had ‘property’ conversations with friends. They all go along the lines of ‘I bought a property for $X and now it’s worth $Y and I am a trillionaire.’
And I am going to tell you these conversations are rubbish. Total crap.
Here’s why.
Let take my example.I purchased my home for $560,000 in 2008. 17 years later I am told it is worth $2m This makes me $1.5m richer and so smiles and high fives all round. There are however, one or two problems with this.
That’s because I haven’t made a $1.5m. Instead, my bank account has been bleeding. Every. Single. Year. Here’s how.
1. Buying costs
I needed a legal man in a suit to cross the t’s and dot the i’s to buy my home. And he charged me a fee. Can’t remember how much but I doubt I got any change back from a couple of grand. Then I paid stamp duty. Not sure why I have to pay the state for buying a home, but you do. From memory that was about $15k.
Now I did not have to take out a mortgage but let’s say I did. The bank manager (also in a flash suit) and gleaming white teeth will charge you a financing fee – usually a percentage of the mortgage – between $5k and $10K then.
So, I would be down about $25K and I have not yet set foot in the house.
2. The improvements and renovations you ‘Need’
Then you move in and find all kinds of things that are not quite right. My eldest suffered from severe asthma so the carpets had to go replaced by wooden flooring.
Over 17 years all types of things ‘needed’ to be done.
We removed 16 trees from our garden. The kitchen needed to be renovated. The outside area ‘needed’ an outside kitchen. The pool fencing did not look nice enough, so glass screens were put in place.
And for some reason my pool tends to find my wallet and swim away (see what I did there) with it. If I were to add up the maintenance and repairs for a pool that hardly gets used, you would be looking at $50K easy over the last 17 years.
We have had the house painted inside and out and about to get the roof sealed and painted too.
And now the lady of the house says the bathrooms are looking a bit tatty so would it okay o have them gutted and looking a bit modern. We just got quoted $70,000 to renovate 2 bathrooms. Last time a checked a bathroom needs a shower, some tiling, a vanity unit, a toilet and a mirror and that’s about it. How can that possible cost $70,000? But it does.
I have not yet counted the numerous trips to Bunnings for routine maintenance such as an electric food disposer (we’ve munched through 3 of these), plants nor the replacement of automatic driveway gate opening unit which just happens to explode every now and then and costs a couple a grand a go.
If I were to estimate what renovations and repairs have cost me, I would probably get about 10 $2 coins change back from about $400,000.
3. Holding costs
We all forget about holding costs. These are things we must pay because we ‘hold’ or own the property whereas if you rent you don’t have to pay.
Think rates, mortgage insurance, property insurance, and maybe body corporate fees.
According to ChatGPT I have paid Brisbane Council about $80,000 in rates and water fees alone over 17 years and if I had taken out a loan of $500,000 with an average interest rate of just 5%, I would have paid a whopping $370,000 to my suited and booted white teeth bank manager in interest alone assuming a principal and interest arrangement.
And I have not yet calculated other holding costs such as property insurance, but I know I paid about $3K last year alone.
And now that $1.5m ‘profit’ I made on the house is no longer $1.5m. It’s bu**er all to be honest.
It gets worse because the costs I have paid out are real – money got transferred out of my bank account whereas the increase in property value is ‘equity’ only.
And that is why I feel that if you are buying a home for $1m plus maybe it does not make sense anymore. For years, we’ve all been told “rent money is dead money” and that being smart starts with getting your own home. I am not sure that is true anymore.
What could happen is that you end being asset rich but cash poor and last time I checked I would rather have $1m in my bank account than a $1m in equity.
Why renting may not be dead money.
Yes, I know rents are going crazy and there could be limited stability because you have less control – the landlord could kick you out.
Renting for say $1,000 a week might be up there, but it could be the norm soon.
That same property might cost you $1,500 a week to own once you factor in mortgage, strata, rates, insurance and a bit of maintenance.
That’s a $26,000 difference every year.
Then when you add in the cost of your deposit, you can see how renting can potentially be better especially if you are clever and do something with the difference.
You see when you buy a home it is a bit risky – it’s all eggs in one basket. Just think of all those homes that have been flooded over the years with insurance companies saying they are not covered. Your asset base is not diversified.
You might find that if you put your $26,000 a year into say the Australian stock market and achieved an average return of 8% the results are not that bad. If you ask ChatGPT a 17 year investment of $26,000 would create a diversified share portfolio of $850,000. Not bad.
But this only works if you invest the difference. If you blow the $26K on heels and a massive 100 inch TV screen renting is dead money.
So, what should you do?
think you need to work out what is best for you. I have clients who will consider buying only. I have others that will rent only, and I have others you have a hybrid system where they rent but buy an investment property which they rent to others.
There is some scientific research that seems to suggest the latter is the one that makes you the wealthiest.
But even though I have been confronted with the evidence that this may be true I will still only ever consider buying my own home. I am just programmed and comfortable that way.
And I think that is where most people sit. Just don’t believe that if you buy you are going to be a trillionaire whereas if you rent you are going to be living on cabbage soup for the rest of your life.
