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Buying a home/unit vs renting

kindred

New member
I had a look at the loan calculator for one of the banks and it showed interest being twice or even three times the value of the home if you borrowed the entire amount. Is it just me or is this entire buy a house thing for an investment just a really really dumb thing to do.
 
As a pure financial investment, buying is not worth it.

However, it gives some security, in that no landlord can throw you out, and once the house is paid for, you no longer have to pay mortgage or rent. This gives you a degree of economic security in years to come.

It's stupid to do a 90-100% loan. Better to live somewhere decent and pay rent for 5-10 years while saving most of your income. How much to save? Well, think of the mortgage you would pay each month if you bought something, subtract the rent you pay today, that is how much you can save.

After 5-10 years you will have 25-50% of the cost of a flash unit or ordinary house, obviously not in the CBD, but within half an hour of it.

You have to sacrifice a bit to do this. By cooking most of your own food, not wasting power, water and gas, shopping around for whatever clothes or appliances you buy, going to the pictures on tight-arse Tuesday and so on, walking under 5km, cycling under 15km and using public transport over 15km, you should be able to live on $200/week, $10,000/year. Add rent to that. Whatever's left you can save.

That's what my wife and I did. Saved for 6 years, more than 50% down on our home. We'll be able to pay off the remaining amount in 3-4 years, or probably 6 years if we have kids. Of course we don't have a mansion, but we don't need or want one.

If you do the typical "borrow 95% and pay off the minimum each month" then yes, you'll be paying 2-3 times the value of the place over those 25 years. For example, friends of ours haver bought a $600,000 house near us, it's a 95% loan, they're paying the minimum over 30 years... yet they have a post-tax six-figure income between them... but they're also going for a snowboarding holiday for a month in France soon.

So if you're a prudent saver it's worth it, if you piss away money then you'll be worse off financially by buying. But if you're the sort to piss money away you won't care anyway :)
 
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If you buy a house for $400,000 and borrow the entire amount (not including stamp duty and legal fees), the interest payable for an interest only loan would be 26k PA at 6.5% interest rates, interest only.

That's $500/week.

Fast track 30 years into the future, you will still owe $400,000 on your house and still be paying $500 per week to cover the interest.

However, your house will most likely be worth 2 mil+ due to capital growth and inflation, so you now have gained 1.6 mil in equity which is yours to keep.

If you had to rent a similar house, you would likely have to pay maybe $1000/week in rent, double your interest repayments.

So what's the better position to be in?
 
Kyle,

One thing you are not accounting for is the great power of leverage and also fixing in prices at todays prices which you can pay off well down the track in the future with cheaper money.

1 million dollars today isn't what it used to be 20 or 30 years ago....
 
If the price rises due to inflation, you are not actually better off. Prices went up by 100%, wages went up by 100%, no-one is able to own more stuff than before.

If buying and renting out homes was extremely profitable, banks would do it. Instead they lend out money at interest. Which suggests that the best thing an individual can do financially is to get rid of debt as quickly as possible.
 
If the price rises due to inflation, you are not actually better off. Prices went up by 100%, wages went up by 100%, no-one is able to own more stuff than before.

If buying and renting out homes was extremely profitable, banks would do it. Instead they lend out money at interest. Which suggests that the best thing an individual can do financially is to get rid of debt as quickly as possible.


No, property actually rises at a rate faster than inflation.
Residential property will just get smaller and higher density in future to be able to be affordable and accomodate the growing population.

Banks make their money by lending money, as they have very high leverage (that word again).
They would not be interested in residential property.
They make money from bank fees, massive credit card interest rates, penalty charges, application fees, lending out money for more than they "buy" it for, etc with massive leverage applied, which magnifies positive returns.

Individuals can not operate like banks, unless you have the funds and licensing to do so.

Debt is not bad kyle.

Bad debt is bad.
Good debt is good.

Decrease your bad debts and increase your good debts and you will do well.
 
If you buy a house for $400,000 and borrow the entire amount (not including stamp duty and legal fees), the interest payable for an interest only loan would be 26k PA at 6.5% interest rates, interest only.

That's $500/week.

Fast track 30 years into the future, you will still owe $400,000 on your house and still be paying $500 per week to cover the interest.

However, your house will most likely be worth 2 mil+ due to capital growth and inflation, so you now have gained 1.6 mil in equity which is yours to keep.

If you had to rent a similar house, you would likely have to pay maybe $1000/week in rent, double your interest repayments.

So what's the better position to be in?
Dodgy arithmetic.

A $400,000 house is nowhere $1,000/week to rent. $500 is more like it. For example, in our area, a $320,000 unit rents for $300/week, or $15,600/yr, a return of 4.9%.

Let's look at your example.

In 2010, we borrow $400,000 to buy a $400,000 house. Some states have stamp duty, all states have legal fees, let's pretend they're part of the $400,000.

From 2010-2040 we pay $26,000 annually in interest only. That is, we pay $780,000 in interest. And we still owe $400,000.

Thus, we are $1,180,000 in the red.

During those 30 years, we had to pay council and water rates. Council rates vary a lot, but a typical figure would be $1,000/yr for a $400,000 home. But this is in proportion to the council-assessed value of the place, which Hulk tells us has risen to $2,000,000 in 2040, council rates would be $5,000 or so - again it varies a lot. Plus council rates have inflation, too - should be $10,000 in 30 years. Call it an average of $5,500 for 30 years. That's another $165,000 down.

- $1,345,000

There are also water rates, at the moment only $500/yr, but expected to rise with global warming, desalination plants and so on. They'll at least double, probably more, with another doubling due to inflation. Thus $2,000 in 2040, average of $1,250/yr for 30 years, $37,500 in all. Small bikkies but it's still money.

-$1,382,500

No home is going to be entirely without maintenance over 30 years. Assuming no renovations (a big assumption), around $1,000/yr for plumbing, electrical, gardening, etc is reasonable. Again with inflation doubling by 2040, $1,500/yr x 30yr.

-$1,427,500

Now in 2040 we sell the thing for Hulk's $2,000,000. Our profit is thus +$572,500.

Now, either it was our primary residence or we rented it out. As our primary residence, the $572,500 is ours, but counts as income for the year, and gets taxed accordingly. So we get about $400,000. Great, eh?

Well, let's compare. Let's imagine we'd taken that $26,000 which would have gone to mortgage, and put it in savings. With 0% interest we'd have $780,000 after 30 years. With 5% or so, $1,800,000.

Of course over the 30 years we'd have to pay rent, etc - but still, we'd have to make an effort to piss away more than the $1,400,000 difference, since that's $47,000/yr.

If renting it out, you face tax on the rent as income, though if the rent falls short of the mortgage currently negative gearing counts it as lower income, it becomes a bit complicated, but you are better off than if it's your primary residence. Of course you have 30 years of dealing with tenants, too. Which may be alright, but may drive you crazy. And there'll be more maintenance to do, people aren't as careful with a rented place as with their own, it's human nature.

Bear in mind we're talking about thirty years here. A lot can happen in 30 years. Just think back to 1980. In the 30 years since then we've had the Cold War end, nations collapse, economic booms and recessions - and interest rates went to 17%. Maybe someone builds a shopping centre next door and your house price doubles, but maybe they build a highway or landfill and it halves. Hmmm.

Some people can make it work. Most people can't. Remember that nobody starts a small business expecting to fail, yet 85% do in the first 12 months Every person I meet starting a business assures me that they'll be different, everyone else is an idiot and they're a genius, that their particular business idea is brilliant and different.

People into real estate are not exempt from this. "Easy money!" they tell me. Uh-huh. Sure.

Best not to assume you're a genius. Maybe you are, but it's 85% likely you're not. Thus, get out of debt as quickly as you can. Debts are okay, but never borrow more or pay them off any more slowly than you absolutely have to.

Save first, borrow later.
 
Kyle, quite simply, your figures are way out and it would take a long time to convince you why, even if your were to believe it.

Facts are facts, and the only proof is by studying those who have already achieved results.

How many multi millionaires would you know of, became financially rich by saving part of their salary/wages and maybe investing a little with after tax dollars?
(not counting their own home which they may have bought 50 years ago in prime position, or similar circumstances)

Not many, if any.....(Scribe)

The only way to get there is through leverage and using OPM (other peoples money).
Then let the power of exponential growth work for you.

Still not convinced?
A good book for you would be "The Richest Man In Babylon"
Very simple principle, well worth reading.
 
I think it really depends on the individual

Sure having your own house after 25 or so years is awesome, but having no life for the 1st 10 years due to having to watch every cent and seeing the prime of your life slip away would really frustrate me. But then you would have security and equity, but it almost seems you gave up your life just to be comfortable when your old and past your prime.

But that maybe generalizing a little too much, for eg
I know of a guy who owned his house by the age of 25, all paid off. Got burnt out from working 70 hour weeks, sold the house and surfed for 5 years, blowing all his money, but he had the time of his life and no regrets.
Started off from scratch and owned another house completely by his late 30s then he lost it through a devorce.
Now hes working his butt off, 55 hour work weeks and the money is once again piling in for him.
Just shows what can happen
 
Kyle and Dreds,

Here's a good example with figures all worked out for you showing that buying is better than renting:

Rent or buy - the $13m question - realestate.com.au

And if you still disagree with buying your own home, an even better strategy is to rent your home and buy an investment property, your cashflow will be even better.
Either way, you will still end up with property and assets/equity.
 
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Adrian has hit the nail right on the head.

He has given thorough reasons why.

Buy as many quality assets as soon as you can, and never sell.
 
Get into constructive debt as soon as you can. Pay cash for stuff. I dont have a credit card. Interest free deals suck.I am 32 and have heaps of debt. It all makes me money. Buy a shit house and live in it. Learn to do basic repairs and renos yourself. A couple years later buy another place and move into it, your first house should be ready to rent.

Dont be too proud to buy in a dodgy area. Poor areas are great money spinners. They wont always be poor. Even if they are considered poor, property value will rise. At 21 I brought a cheap house, i have never lived in it, have spent about 80k on it, rent has doubled its now worth roughly triple and i am yet to pay a mortgage payment out of my own money. Look after your tenants, do repairs quickly. Treat them well, remember they are buying you a house.Buy Now!!!
 
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Can I suggest ebaying a copy of rich dad poor dad.
Afterwards you will wonder why anyone would even consider not buying a house (you will probably want to buy half a dozen!).
 
It seems like the pro houses always seem to go back to the same arguments. So I guess your a millionaire from your leverage Hulk? I don't know anyone that is a millionaire through owning property. The majority of property owners that i know have used their leverage have ended up in debt/bankrupt.

Although if we aren't looking at leverage and just at mortgage payment vs rent then owning does seem to make a bit more sense at least for the long term.

Its really difficult to get good financial advise in the country as everyone seems to be trying to sell their product or something they have a vested interest in.
 
I don't know anyone that is a millionaire through owning property. The majority of property owners that i know have used their leverage have ended up in debt/bankrupt.

Look at any of the older home owners in nicer parts of Melbourne or Sydney.

To use my Grandfather as an example, he built his home 50 years ago for four and a half thousand pounds.

The house two doors down from him recently sold for well over $1m.

Buy as many quality assets as soon as you can, and hold them for as long as you can.

It will make you wealthy.
 
Personally I reckon Jan Somers' books are a better read than Kiyosaki (Rich Dad Poor Dad). They ought to have enough figures in them to satisfy you, Kyle.

I highly recommend the Somersoft forums if you want to talk property with other Aussies.

I am a big fan of property investing. Bought PPOR (principal place of residence) about 1 year ago and currently negotiating to buy 2 investment properties in Sydney. Both of these will be cashflow neutral, about 10% undervalued. The incoming rent covers the interest only repayments and other expenses like council rates, strata, landlord insurance etc etc (Trust me I've done a huge spreadsheet to account for all these).

In short, interest only repayments will remain roughly constant over the next 10-20 years but rents can only go up. Value of the property will also increase too (should average at least 5% pa which is greater than inflation 2-3% pa) Win-win situation all round.
 
Personally I reckon Jan Somers' books are a better read than Kiyosaki (Rich Dad Poor Dad). They ought to have enough figures in them to satisfy you, Kyle.

I highly recommend the Somersoft forums if you want to talk property with other Aussies.

I am a big fan of property investing. Bought PPOR (principal place of residence) about 1 year ago and currently negotiating to buy 2 investment properties in Sydney. Both of these will be cashflow neutral, about 10% undervalued. The incoming rent covers the interest only repayments and other expenses like council rates, strata, landlord insurance etc etc (Trust me I've done a huge spreadsheet to account for all these).

In short, interest only repayments will remain roughly constant over the next 10-20 years but rents can only go up. Value of the property will also increase too (should average at least 5% pa which is greater than inflation 2-3% pa) Win-win situation all round.

Don't forget, you could reasonably assume your wage would go up over this time. So the half your pay it costs in interest per month this year might be a third of your pay in 5years.

For the record, I have owned my house for 3 years and my interest payments are well under half what it would cost me to rent the place.
I would only ever rent a house if I was renting out my current house, which I am strongly considering doing.

Each to their own though, everyones situation is different and what is best for me may not be best for the next guy.
 
It seems like the pro houses always seem to go back to the same arguments. So I guess your a millionaire from your leverage Hulk?

No, nowhere near making a mil from property yet, but have not held much property so far, and Sydney has been flat for about 7 years now where my property is.
However, looking for some action this year and have no problem going into debt for a mil or 5.

I don't know anyone that is a millionaire through owning property. The majority of property owners that i know have used their leverage have ended up in debt/bankrupt.

They probably overextended, borrowed more than they could repay, had bad savings habits, maybe didn't have enough cashflow for serviceability, maybe didn't allow a cash buffer in case of emergencies, or maybe just made bad purchasing decisions.

Although if we aren't looking at leverage and just at mortgage payment vs rent then owning does seem to make a bit more sense at least for the long term.

Yes it does, especially when it doesn't cost much more to buy than rent, and your payments will be fixed, unlike rent which will only rise in future.
But it is still leveraging as you are putting very little money in at the start to control a property worth alot of money.
You will also be entitled to the FHOG (first home owners grant), and maybe Stamp duty concessions, depending on the state you buy in.
If you get into cash flow problems you can always rent a room or 2 out to help you bring in some more cash.

Its really difficult to get good financial advise in the country as everyone seems to be trying to sell their product or something they have a vested interest in.

The best way is self education and research, then make up your own mind.
Dont take advice from people who have a financial interest in the product/service they are selling, as you know the information will be biased.

Don't forget the value adding possibilities through self renovations as has been mentioned in a previous post.
You can't do this with a rental home can you.
 
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