Should You Rent Or Should You Buy?

Ahhh, the age old question that every millennial faces at some point in their young adult lives. Should I keep paying an extortionate amount of rent each week to live in a hipster neighbourhood right in the heart of the CBD, or should I buy a developed house in the middle of a ‘lifestyle estate’ two hours from the nearest city? The contrast between the two might not actually be that distinct, but the decision between renting and buying a property is still a huge issue that faces almost every twenty-something.

For me, living in one of the most expensive cities in the world makes it really bloody difficult for me to know how I’m ever going to be able to afford a house that isn’t the size of a shoebox. Hell, right now, I can’t even afford to own a shoebox in the suburbs that I want to live in. This makes it really hard for me to keep finding the motivation to work my ass off to be able to afford to buy a place when I currently rent a pretty beautiful house with my friends anyway.

That’s why I teamed up with my old mate, The Shady Economist, to hash out the pros and cons of both renting and buying.

Who The Hell Is The Shady Economist?

Alex Colalillo, aka The Shady Economist, is your go to girl for everything economics to geopolitics. If you felt your eyes glaze over just at the mere mention of those words, you are not alone. Luckily, Alex is a self-described ‘responsible economist who also likes to have a lot of fun’ and this definitely shows in the way she keeps her listeners informed about world-wide economic events. Seriously, this girl uses drag queens and donuts to explain complicated economic issues which makes it a hell of a lot easier for all of us without an economics degree to understand.

So, here’s my summary of what The Shady Economist has to say about the pros and cons of buying vs renting (with a few additional points from me).

Pros of Buying

1. The Return On Investment Can Be High

Take a second to imagine you bought a house in Sydney around 2013. Between 2013 and 2018, the house prices in Sydney rose by over 70%. Yes, you read that number correctly. Seventy bloody percent. If you buy at the ‘right’ time, you have the potential to make a serious profit when you sell.

2. There Are Tax Benefits

If you choose to live in the house you own, you can get some serious tax benefits because you dodge having to pay any capital gains tax. Capital gains tax is a tax that you have to pay on any profit you make when you sell a property or an investment.

3. You Can Use The House As Leverage

Ok, this one gets a little complicated but stay with me. Let’s say you owe $400k on a house but the value of the house has increased and is currently worth $500k. This means that you have $100k in equity. In lay terms, equity is just the difference between the value of the asset and how much you owe on that asset. You can then use this $100k as leverage if you want to take out another mortgage with the bank in order to buy a second property.

4. The Payments Decrease Over Time

Initially, mortgage repayments are going to suck. They might even prevent you from doing all the things that you want to do like eating out every night or travelling around the world. The good news is that the value of these mortgage interest repayments is going to decrease over time as you keep paying off a greater proportion of the debt. The even better thing is that, if you work hard to pay off your mortgage, eventually those repayments are going to stop altogether.

5. There’s Also Non-Financial Benefits

Ever had a landlord kick you out? Or refuse to let you hang paintings on the wall? Or take forever to get back to you about fixing your damn dishwasher that’s been broken for two weeks? A benefit of owning your own home is that, not only can nobody kick you out for no reason, but you can also do whatever the hell you want with the place.

Cons of Buying

1. Interest Repayments Are Dead Money

You ever heard the term ‘rent money is dead money?’ Well, The Shady Economist argues that interest repayments are dead money too. Imagine you took out an $800k loan to buy a $1 million house. If we assume the mortgage variable interest rate is 3.75%, you would pay almost $30,000 of interest alone each year. Instead, you could rent a place for a similar, if not lower, price.

2. Opportunity Cost

As someone who hasn’t taken an economics class since Year 10, all I can remember about opportunity cost is that, if I only have $5 I can either choose to spend that money on an ice-cream or chocolate. I can’t have both. Similarly, if you choose to invest your money in a property, then that means you can’t spend that money elsewhere. Duh. You won’t be able to spend that money on a round-the-world plane ticket, or invest it in an ETF, or splurge on a new sports car.

3. There’s Always Other Costs Involved

The first time I ever heard about stamp duty my mind was frickin’ blown. The government charges you money to buy a property? Are you serious? Unfortunately, yes, there are costs associated with buying a property that aren’t directly involved with actually paying for the property. The estimated costs associated with buying a house are 4.3% of the value of the property, and the estimated costs of selling a house are approximately 3% of the value. These costs don’t even include costs like insurance, council rates and repairs.

4. Houses Are Not A Liquid Investment

Unlike investing in the share market, the money that you invest into a property can’t be sold straight away and quickly converted into cash.

5. Houses Can Be A Liability

A liability is something that takes money out of your pocket. Even once you pay off your mortgage, houses are always going to take money out of your pocket. There’s always going to be taxes to pay, and there’s always going to be things that need to be repaired and maintained. This means that buying a house is always going to have a liability component.

6. You’re Stuck In One Location

Have you ever lived somewhere and thought to yourself “damn this area kinda sucks?” I know I have. Maybe the location isn’t actually as convenient as you thought it would be, or maybe the restaurants and cafes near the place are pretty mediocre, or maybe your next door neighbours have decided to turn their house into a massive construction site. Whatever your reason for not liking the area is, when you’re renting it doesn’t really matter because at the end of your lease you can get the hell out of there. If you buy a house though, you’re committed to that location whether you like it or not.

What About Renting?

Pros Of Renting

1. The Initial Costs Are Lower

Hands down the best thing about renting? You don’t have to sell you left kidney to be able to afford to move into a place. Renting is SO much more accessible for most people because, rather than needing to put down a huge lump sum of money, you just need to put down a deposit (which hopefully you get back at the end of the lease) and the first few weeks of rent. I know that this isn’t always easy, and can actually be really difficult for some people, but it’s a hell of a lot cheaper than saving up for a house deposit.

2. Your Return On Savings Can Be Higher

If you’re not putting all of your money into mortgage repayments or putting it aside for future repayments, you have the option to put your savings elsewhere such as in shares, or an ETF or a high-interest savings account. This means that it’s possible for you to to earn a higher return on savings than if you had that money in your property.

3. Less Risk During An Economic Downturn

Let’s think about the fact that a lot of houses dropped in value thanks to the current global pandemic. If the home that you are renting lost value, it really doesn’t affect you at all. On the other hand, if the home that you own dropped in value, then that really does affect your financial situation. When you rent, you mitigate the risk that comes with an economic downturn.

4. More Opportunity To Diversify

When you buy a house, a huge portion (if not all) of your money will be tied up in that investment. That means that all of your eggs are in one basket. On the other hand, when you rent, you have the opportunity to invest your money in a more diverse range of assets like stocks, bonds, commodities, cash and ETFs. By diversifying, you are less at risk of all of your assets losing value.

5. You Have Flexibility

Buying a house means that you can’t just pack up all of your shit and move to the other side of the world next week because, unfortunately, you actually have some responsibilities to take care of. On the other hand, renting means that you have so much flexibility to change your life whenever the hell you want to. Got a job offer in another country? Off you go. Want to get that UK working holiday visa before you turn 30? No worries when you’re renting. If you’re the type of person that doesn’t know where they are going to be, and what they are going to be doing, in a few months time then renting gives you the option for you to keep doing you.

6. You Can Live Where You Can’t Afford To Buy

Right now, I live in a four-bedroom townhouse less than 10km away from the Sydney CBD. Could I afford to buy a house around here? Absolutely not. Renting gives you the opportunity to live in areas that you can’t afford to buy in which is pretty bloody important for me because I like to live close to the city, close to work and in an area with lots of restaurants and cafes. You also don’t have to pay the council rates to live in the area you love which is always an added bonus.

Cons Of Renting

1. Rental Costs Are Bloody Expensive

Lets revisit that saying ‘rent money is dead money,’ shall we? We all know that rent prices are damn expensive, and the cost of renting a place is only going to keep rising due to inflation and rising property prices. The argument here is that, at least when you own a house, the money you are paying is going towards an asset that is yours rather than just paying money to borrow someone else’s asset.

2. The Rent Trap Is Real

What’s the rent trap? When a large percentage of your money is being spent on rent, you’re unlikely to be able to save a lot of money to put towards a future house deposit. This means that you end up in a cycle of renting that becomes pretty bloody hard to break (this is giving me alllllll the feels).

3. The Payments Never End

If you commit to buying a house, and you work hard to pay off your mortgage, eventually you won’t have to pay mortgage repayments anymore. However, if you choose to rent forever then your payments are never going to end. Even when you retire, and your income drops, you’re still going to have to pay those ever-increasing rental prices.

4. You Can’t Do Whatever The Hell You Want

Sure, you can tell your landlord that you don’t have a cat, or that you haven’t just painted the kitchen a whole different colour, but it’s pretty bloody annoying having to hide your lies every time you have a rental inspection. Unless you live in a state or territory that gives tenants a lot of rights, it can be frustrating as hell not being allowed do whatever you want in your own home.

So, I asked The Shady Economist what we should all be doing. Should we be saving all of our cash to buy or should we just keep renting nice houses in cool locations?!?

“The bottom line is, sometimes it’s smarter to rent and sometimes it’s smarter to buy. Rather than giving in to one side or another, it’s smarter to assess your lifestyle circumstances, financial situation and learn the economic dynamics of the housing market that I mentioned before. Then you can figure out what’s right for you” – The Shady Economist.

I know that I’m going to keep saving my money to put towards buying my dream house, but that doesn’t mean that that’s the right decision right for you. If you’re still not sure, listen to The Shady Economist’s latest podcast for more of an economic insight into the topic. Find it on Apple Podcasts or Spotify now.

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The Stingy Bitch

Based in Sydney, Australia.
Created in 2020.

Disclaimer:
This site and all of it’s contents are provided for entertainment purposes only and do not constitute personal financial advice. All products that are mentioned are general product advice only, not personal product advice. Not all options are presented and my opinions are subject to change. All content and posts have been prepared as a general summary only and is not intended to be financial advice with respect to any particular matter. This post should not be relied on with respect to any particular matter. If you have questions about any aspect of the content or this site or otherwise require personal financial advice, you ought to seek financial advice. The author disclaims liability to any person who relies on this post.

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Published by thestingybitch

A Twenty-Somethings Guide to Saving Money Whilst Still Living Your Best Life

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