“Renting is dead money”.
That’s the often-repeated refrain of real estate agents and people who have a mortgage.
But is renting really that bad financially?
In this video, I’ll run through a simple scenario comparing renting vs buying, but
first, let’s see what some cherry-picked experts have to say.
Phil Ruthven, founder of business information company IBISWorld, has plenty of money, but
has chosen to rent over the last 30 years.
He recently told the ABC,
“I simply did the arithmetic to work out how you might approach retirement being either
an owner or a renter.
You retire on three times the amount of money that a person who owned a home would if you
rented or leased a home for most of your life.
You could buy a home and still have heaps left over to live very comfortably if you
have rented for 20 or 30 years like I did.”
Accounting firm EY undertook a study earlier this year comparing renting vs buying and
came to a similar conclusion.
EY Chief Economist Jo Masters had these words to say,
“We really wanted to question what we found was quite a wide-held belief that renting
is dead money and that the only way to get ahead is to buy a property.
More often than not, over a 10-year period, the renter comes out financially better off.”
So to test their findings, let’s work through a simplified scenario ourselves.
Imagine there are two people, Mr Black and Mr Brown.
They have identical salaries and living expenses.
They live in the same suburb, own the same car, and live the same distance from work.
They are both good savers and have saved up exactly $150,000 each.
Mr Black goes all in and decides to buy a house in Brisbane for $650,000.
(I’m using the details of an actual house that is currently for sale in Brisbane for
$659,000 currently rented out for $400 per week until 2020, but let’s assume Mr Black
can get the house for slightly cheaper and can move in straight away).
He uses his $150,000 as a deposit and gets a loan for $500,000 over 30 years at 3% interest
rate.
Now that’s a really good rate.
To keep things simple, however, I will assume that the interest rate will not change over
time, and I will not factor in things like inflation, or salary increases.
Yes, in reality, interest rates will probably decrease in the short-term, but who knows
where they’ll be in 10 or 15 years time.
So let’s not speculate.
Mr Brown rents the house down the street (a near-identical house with the same number
of bathrooms and bedrooms and all the rest of it).
He can rent the house for $400 per week (which as I said before is the actual current rent).
As we’re not factoring in inflation, we’ll keep the rent the same throughout the entire
period.
Mr Brown chooses to invest his $150,000 and plans to add to it regularly.
Let’s say he’s a fairly conservative investor and spreads his investment out over a number
of different asset classes — cash, bonds, and a market-tracking ETF in the share market.
Let’s say he averages the same rate as the mortgage rate, 3%.
That’s a very conservative estimate, but let’s see where it gets us.
Using an online mortgage calculator for Mr Black, for a 30-year loan at 3% interest rate
and zero fees (I pretended that he actually found a bank with zero fees), he’ll have
to pay back $2,108 per month.
Mr Brown’s monthly rental expenses are about $1,734.
However, houses need maintenance, and this house in Brisbane isn’t exactly new (It
was built in 1980).
So let’s use the commonly quoted 1% Rule (that is, 1% of the purchase price of your
home should be set aside each year for ongoing maintenance).
This means Mr Black would have to set aside about $6,000 a year, or about $500 a month
for maintenance.
Let’s be kind to him and only use half of that, so $250 per month.
Mr Brown has no maintenance costs as he is renting.
Let’s assume that Mr Brown and Mr Black use an identical amount of electricity, water,
gas, mobile phone and internet, so let’s not factor those in.
They also have an identical amount of contents insurance, so let’s also not factor that
in.
However, Mr Black has to pay home insurance.
I got a real quote online for the building only using the actual details of the house
in question.
It works out to be about $88 per month, but let’s round that down to $80 per month as
I may have gotten a few of the details wrong.
Mr Black also has to pay council rates.
Using actual rates data from each suburb, Mr Black will have to pay about $160 per month
in rates.
So the total housing expenses for Mr Black will be about $2,598.
Remembering that this is a very conservative estimate that favours Mr Black.
He’s getting a really good deal here.
Mr Brown has total housing expenses of $1,734.
Let’s assume that Mr Brown is a very good saver.
Every extra cent that Mr Black spends on his house, Mr Brown will add to his investments.
So that means Mr Brown will be adding $864 per month to his investments.
Using an online compound interest calculator, over 30 years at 3%, Mr Brown will end up
with about $872,000 in savings.
Mr Black over 30 years will own his house valued at $650,000.
Remembering, I haven’t taken into account inflation.
Yes, house prices could rise above the rate of inflation, but that’s not a guarantee
(as we all saw post 2008 in the United States — be careful when you hear somebody say
that house prices will always go up).
So with all things being equal using very conservative estimates favouring Mr Black,
Mr Brown comes out ahead by more than $222,000.
Remembering, I halved the amount of maintenance Mr Black had to pay.
I rounded down all the other expenses, and I grossly undervalued Mr Brown’s investment
potential.
In reality, investment returns of 5 or 7% would not be unlikely, especially if he put
more of his money into the share market.
Just for arguments sake, I’ll bump up his average returns to 5% instead of 3%.
With regular savings, he would end up with over $1.3 million (not taking into account
inflation, and increases in salary etc.).
So financially speaking, renting is not dead money, well no more than mortgage interest
paid back to the bank.
Of course, this all depends on where you choose to live.
I’m sure you could find an inner-city apartment with much more earning potential than say
a suburban house.
To be fair, my little example doesn’t necessarily mean that buying a house is bad.
Having a mortgage can have a number of benefits.
First of all, as many people often say, a mortgage forces you to save.
Mr Brown was a good saver, but many renters in his situation would spend that extra money
on non-essential goods and services like eating out, or getting massages.
So yes, as a renter, you need to be very strict on your spending habits in order to save like
Mr Brown did.
Secondly, owning a home has many intangible benefits like the security of not being kicked
out by a landlord, and the flexibility to renovate your home.
But renting also offers some benefits, like flexibility in where you live.
In the end, it’s ultimately up to you what you do regarding buying a house or renting.
If you want to buy, buy!
But don’t go around telling your renting friends that renting is dead money, because
you’re just repeating a myth spread by the property industry.
If you want the stability of a home, get a mortgage!
But if you want to have more flexibility, and you’re good at saving, maybe renting
is the way to go.
I’ll finish with some sage advice from American businessman Robert Kiyosaki (I have a link
to his books in the description below),
“My rich dad, my best friend’s dad, taught me the simple definition of an asset and a
liability.
An asset puts money in your pocket.
A liability takes money out.
Many so-called experts will point to things like paying down principal, tax breaks from
mortgage interest, and appreciation as reasons why the house is an asset, but paying down
principal is simply saving and savers are losers.
The tax breaks for your mortgage do not offset the costs that go out of your pocket each
month, and if you’re banking on appreciation, you’re basically gambling, as homeowners
in the Great Recession painfully discovered.
This is not to say you shouldn’t buy a house.
I’m simply trying to help you see that it is not an asset.
Rather it is your home, and should be enjoyed for that, not as your ticket to a secure retirement.”
Anyway, that’s it for me.
Thanks for watching.