Should you rent or own a property?
Renting a home can be an ideal option for those wanting extra flexibility and less responsibility. While buying a home can involve some serious saving and commitment, renting can help you maintain your flexibility and lifestyle.
Especially for those in expensive housing markets, renting a house can be a simple way to get the space you want without having to spend years saving for a down payment. Renting also allows you a bit more flexibility than homeownership would, whether you’re in a house or an apartment. With renting, you’re not tied to the property long-term, and you’re also less responsible for saving for repairs, paying for taxes and insurance, and keeping up with other expenses.
Renting means you can move without penalty each time your lease ends. However, it also means you could have to move suddenly if your landlord decides to sell the property or turn your apartment complex into condos. Less dramatically, they could bump up the rent to more than you can afford.
The biggest myth about renting is that you’re “throwing away money” every month. Not so. You need a place to live, and that always costs money, in one way or another. While it’s true that you aren’t building equity with monthly rent payments, you also aren’t building equity with much of the money you’ll put into owning a house.
When you rent, you know exactly how much you’re going to spend on housing each month. When you own, you might pay nothing more than your mortgage and regular bills one month. The next month, you might spend an additional AU$12,000 on a new roof, which your homeowners’ insurance might not cover. But you’ll never have to pay to replace your roof when you rent. Your monthly, home-related expenses, such as renter’s insurance, tend to be more predictable.
As a renter, you face unpredictable rent increases each time your lease is up for renewal unless your apartment is rent-controlled. If you live in a desirable part of town, rent increases can be steep. In contrast, if you get a fixed-rate mortgage, your monthly house payments will never increase (though property taxes and insurance premiums probably will).
While homeownership is often touted as a way to build wealth, your home can lose value. The acceptable neighbourhood you moved in could decline. A major employer can leave the area, causing a significant population decline and a surplus of housing. Alternatively, there could be a residential construction boom, which would also keep prices down. You might buy a house for AU$200,000 tomorrow and in 30 years find that it’s still worth AU$200,000, meaning you’ve lost money after inflation.
Another bit of misleading conventional wisdom: Get a mortgage to get the tax deduction. True, the home mortgage interest deduction reduces your out-of-pocket expenses for mortgage interest early in your loan term, as long as you’re itemizing. But tax deductions are not a reason to buy a house. Here’s why: For every $1 you spend in interest, you might save 25¢ on your tax bill. In short, you’re not coming out ahead. What’s more, as you pay down your mortgage and the proportion of your payment that goes toward interest decreases, so will the tax break.
Of course, renters get no mortgage tax deduction at all. But they can take the standard deduction that’s available to all taxpayers.
Do you like having your evenings and weekends to use as you please? Do you work long hours or travel frequently? If so, then the time commitment that comes with homeownership might be more than you want to take on. There are always projects around a house that you will need or want to take care of, from finding a plumber to replace a rusted-out pipe to repainting the bedroom to mowing the lawn. If you live in a community with a homeowners association, the POAA might take some homeownership chores off your plate. That will usually cost a few hundred dollars a month. But beware of the headaches that association membership can entail.
If you rent, your landlord will take care of all the repairs and maintenance, though of course they may not be done as quickly or as well as you would like.
Although not as universal as homeowners’ insurance, renter’s insurance is often recommended for those leasing homes and is increasingly required by landlords.
Homeownership brings intangible benefits, such as a sense of stability, belonging to a community, and pride of ownership. However, it is not good for restless or nomadic types. Real estate is the original illiquid asset. You might not be able to sell when you want if the housing market is down. Even if it’s up, there are significant transaction costs when you sell. Changing your mind about where you want to live is far more expensive when you own.
The overall cost of homeownership tends to be higher than the overall cost of renting. That is true even if the monthly mortgage payment is similar to (or lower than) the monthly rent.
Here are some expenses you’ll be spending money on as a homeowner that you don’t have to pay as a renter:
- Property taxes
- Trash pickup
- Water and sewer service
- Repairs and maintenance
- Pest control
- Tree trimming
- Homeowners insurance
- Pool cleaning (if you have one)
- Lender-required flood insurance, in some areas
- Earthquake insurance, in some areas
Perhaps the biggest throwaway expense is mortgage interest, which can make up nearly all of your monthly payments in the early years of a long-term mortgage. Take this typical scenario: You borrow AU$100,000 at 4% for 30 years. Your first monthly payment will be AU$477.42, of which AU$333.33 is interested, and AU$144.08 is principal. It will be about 13 years before more of your monthly payment goes toward principal than toward interest. In total, you’ll lose AU$71,869.51 in interest (though, admittedly, you’ll recoup some of that in tax deductions).
Even renovation projects don’t often increase your home’s value by more than what you spend on them. On average, you’ll get back 66 cents for every dollar you shell out on a home improvement project. The projects that recoup the most are not glamorous things you’ll be excited about doing. The best return comes from replacing a garage door.
Once you add up all these costs, you might find that you’re better off financially by renting and investing the money you would have put into a home into a retirement account.
Reasons Why Renting Could Be Better Than Buying
No Maintenance Costs or Repair Bills
One of the benefits of renting a home is that there are no maintenance costs or repair bills. When you rent a property, your landlord is responsible for all maintenance, improvement, and repairs. If an appliance stops working or your roof starts to leak, you call the landlord, who is required to fix or replace it.
Homeowners, on the other hand, are responsible for all home repair, maintenance, and renovation costs. Depending on the nature of the task, it can get quite pricey.
Access to Amenities
Another financial benefit of renting is having access to amenities that would otherwise be an enormous expense. Luxuries such as an in-ground pool or a fitness centre come standard at many middle scales to upscale apartment complexes with no additional charge to tenants.
If a homeowner wanted to have access to these amenities, it would likely cost thousands of dollars for installation and maintenance. Condo owners would need to pay monthly fees for access to them.
No Real Estate Taxes
One of the major benefits of renting versus owning is that renters don’t have to pay property taxes. Real estate taxes can be a hefty burden for homeowners and vary by county—in some areas the costs can be thousands of dollars annually.
Although property tax calculations can be complex, they are determined based on the estimated property value of the house and the amount of land. With newly built homes getting larger and larger, property taxes can be a significant financial burden.
No Down Payment
Another area where renters have a better financial deal is the up-front cost. Renters generally have to pay a security deposit equal to one month’s rent, a deposit that will theoretically be returned to them when they move out, provided they haven’t damaged the rental property.
When purchasing a home with a mortgage, you’re required to have a sizable down payment—typically around 20% of the property’s value. Of course, that down payment results in having equity in the home, which only increases as the mortgage is gradually paid off. And once you own a home free and clear, you have a valuable investment that renters never attain.
More Flexibility as to Where to Live
Renters can live practically anywhere, while homeowners are restricted to areas where they can afford to buy. Living in an expensive city such as Melbourne might be out of reach for most home buyers, but it might be possible for renters. Although rents can be high in areas where home values are also high, renters can more readily find an affordable monthly payment than home buyers.
Few Concerns About Decreasing Property Value
Property values go up and down, and while this may affect homeowners in a big way, it affects renters substantially less, if at all. Your home value can impact the amount of property taxes you pay and the amount of your mortgage. In a rocky housing market, renters may not be as adversely affected as homeowners.
Flexibility to Downsize
Renters have the option to downsize to more affordable living space at the end of their lease. Such flexibility is especially important for retirees who want a less costly, smaller alternative that matches their budget.
It’s much more difficult to break free of an expensive house because of the fees involved with buying and selling a home. Also, if a homeowner has invested a significant amount of money in renovations, the selling price might not cover these costs, leaving them unable to afford to sell and move.
Fixed Rent Amount
Rent amounts are fixed for the span of the lease agreement. While landlords can raise the rent with notice, you can budget more efficiently, because you know the amount of rent you are required to pay.
Fixed-rate mortgages also allow for efficient budgeting, but adjustable-rate mortgages can fluctuate, often resulting in rising mortgage payments due to higher interest charges. Property taxes are another variable that can increase costs for homeowners but don’t affect renters.
Lower Insurance Costs
While homeowners need to maintain a homeowners insurance policy, the equivalent for renters is a renter’s insurance policy, which is much cheaper and covers nearly everything owned, including furniture, computers, and valuables. The average cost of renter’s insurance is AU$180 per year, while the average Homeowner’s insurance policy costs AU$1,211 per year.
Lower Utility Costs
Although homes can vary in size, they are typically larger than rental apartments. As a result, they are more costly to heat and also can have higher electric bills. Rental properties typically have a more compact and efficient floor plan, making them more affordable to heat and power than many houses.
How to decide what’s right for you
If you’re older, are getting married or have children, homeownership can seem like the obvious choice. It’s the next “adulting” thing to do, even if you don’t feel ready for the burdens of homeownership.
No matter what the numbers say, always think about whether you’re ready to give up the ease of renting. Yes, it’s hard not being able to paint the walls whatever colour you want. But it’s also harder to get rid of a house that’s infested with termites or cracks in the foundation than it is to bail on a lease.
Advantages of buying a home
- Owning a home offers the long-term benefits of security, equity and potential growth in personal wealth.
- The value of a home will appreciate over time, and if you decide to sell, you can earn a profit off the sale.
- When you buy a house, it becomes your legal property, which allows you greater freedom in its use without restrictions often enforced by a Landlord.
- Being a Homeowner allows you creative control of your property. You can alter the property, including décor changes, landscaping and renovations, to suit your needs and your style.
- You have the option of buying to rent, which enables a Homeowner to generate income from renting out the property. This income can be put towards the home loan.
- Being a Homeowner who ensures repayments are made on time can improve your credit profile. Not only will you have a large investment to your name, but paying your monthly bond repayments on time increases your credit score.
- You have the option to refinance your bond amount should you wish to withdraw a large amount of money to pay for major purchases.
- There is an opportunity to save money in the long term as there are possible tax deductions related to income-generating properties.
Disadvantages of buying a home
- Being a Homeowner comes with huge financial responsibility, including bond repayments and regular house maintenance.
- There are additional costs to homeownership, and these usually include rates, taxes, insurance, and maintenance for which the Homeowner is responsible.
- A Homeowner runs the risk of not making any profit through resale. This is often caused by economic factors such as a recession or high-interest rates, or simply through a particular location becoming less desirable.
- A Homeowner has less mobility when it comes to being able to move home than a Tenant who rents on a short-term basis. A Tenant can leave a property after fulfilling the notice period, which is usually one month. However, a Homeowner is likely to be dependent on selling their home before being able to buy a new one, and therefore it might take longer to be able to move homes once the decision has been made to do so.
Advantages of renting a home
- Renting a property allows more flexibility than owning a home. This is ideal for those who could be faced with sudden changes such as job relocation. Renting requires no long-term commitment from a Tenant, and is the best option if you don’t intend on staying in one place for a long time.
- As a Tenant, there is the possibility of living in an area in which you could not afford to buy.
- Moving out is easier for a Tenant than a Homeowner as there is no stress of finding someone to take over the lease, or finding a Buyer to purchase the property as this is the responsibility of the Homeowner or Landlord.
- The only insurance required by a Tenant will be to cover the contents of the home, while all maintenance work on the property is for the Homeowner’s account, as is homeowners insurance.
- After paying rent, a Tenant may have additional money which they can use to invest elsewhere, whether it is saving towards buying a house or investing in the stock market, and need not worry about putting additional funds into a home loan.
Disadvantages of renting a home
- A Tenant is bound by the rules of the lease agreement, which can impact the freedom to use or renovate the property.
- You cannot make changes to a rented property without the consent of the Homeowner.
- When renting, you will often have to deal with a Rental Agent who will then be the liaison between you and the Homeowner. This can result in issues taking longer to resolve since there is a 3rd party involved.
- Renting offers no wealth creation or return on investment since the property will never legally belong to the Tenant, and instead, the Tenant is paying towards the Homeowner’s home loan.
- When renting a property, you will have no control over annual rental fluctuations which are directly affected by inflation.
- There is no guarantee that a lease will be renewed when it expires.
Owning a home can be beneficial for homeowners over the long run due to the amount of equity they acquire in their home. Renters have nothing tangible to show for years of rental payments. However, for those who are looking to avoid the hassles of homeownership, the costs of upkeep, and property taxes, renting might be a better option. Of course, it depends on each person’s lifestyle, financial situation, and whether they’re working or in retirement.
Sometimes it’s better to rent than to buy a home. When you buy a home, you’re tied to one place. It can also be difficult to sell your home if you get a career opportunity elsewhere. Renting can offer you a nice home, but with more flexibility.
Homeownership does have its merits, of course. Owning a home might be beneficial over the long run if the house price appreciates more than a diversified financial portfolio, or if people don’t have to move for their jobs or family, or if marriages last, or if neighbourhoods and financial situations don’t change.
Crucially, the housing market is often segmented, meaning rental stock can be of lower quality for the same carrying costs as homeownership—in that case, buying might make sense. Some people like to improve their homes and renovate, while your landlord will only make “necessary repairs.”
However, for those who want bargaining power at work, would like to avoid the hassles and financial uncertainty of homeownership, and don’t like owning so much durable consumer capital, renting might be a better option.