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Renting vs Buying a Home

Written by

Shaun McGowan

For many Australians, the question of whether to rent or buy is a difficult one. The flexibility and affordability of renting are great, but buying a home offers stability and the opportunity to start building wealth.

In this guide, you will learn:

  • The pros and cons of renting, buying and rentvestment
  • Whether buying is a better financial option than renting
  • How you can compare your options

The answer to the renting vs buying question is different for everyone. You’ll need to weigh up all the factors and consider what’s best for your lifestyle and financial circumstances.

Which is the better financial choice - renting or buying?

There is a common assumption that buying property is always a better financial choice than renting, and that rent money is dead money. This isn’t true, and in some cases renting may actually be the better option.

Below, we’ve broken down the pros and cons of renting, buying, and ‘rentvestment’ to provide a balanced overview of the available options.

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Pros and Cons of Renting

Renting is cheaper and more flexible than buying, which frees up your money to invest or spend elsewhere. However, it also means less security and no forced savings.

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Pros of Renting a Home

Cheaper with a lower upfront investment

In most cases renting a property is the cheaper option. There is no large upfront investment required like when you purchase a property and usually, ongoing rent costs are lower than mortgage repayments. This may enable you to invest your money elsewhere in:

  • Managed or indexed funds.
  • Shares, stocks and/or bonds.
  • Business ventures.

If you invest your money well while renting your returns may be even higher than property price increases. Renting may also free up money to spend on things you enjoy like eating out and travelling.

No repairs, rates or body corporate fees

When you rent a property you know exactly how much it will cost you each month (the amount of your rent). That means you won’t have to worry about extra costs like repairs and maintenance, rates or body corporate fees like you would if you bought a home. This provides certainty for budgeting and helps keep your costs down.

More flexibility

If you want to leave your rental and move elsewhere it’s easy. Many tenancies are on a rolling month-by-month basis, and very few have fixed terms longer than a year so the commitment required and the costs of moving on are much lower than if you were to buy.

Low risk

When you invest in property there’s always a risk that it’ll decrease in value, or that it’ll require expensive repairs. When renting there are no such risks.

Cons of Renting a Home

No forced savings

One of the biggest advantages of buying a home is that your mortgage repayments act as forced savings. Every month when you make a repayment you reduce your loan principal and increase your wealth. With renting you have no such thing, so you may find saving money difficult.

Less security

When renting you have less security and certainty because your landlord can decide to sell or move into your rented home. As a result, you may move more often or even be forced to move when it’s inconvenient.

Pros and Cons of Buying

Buying a home is the Australian dream, plus it gives you a chance to increase your wealth through capital gains. With that said there are drawbacks - buying a home can be much more expensive and riskier than renting.

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Pros of Buying a Home

The possibility that your property will increase in value

When you buy a home if the market’s strong it may increase in value, which will increase your equity and allow you to sell for a profit. The strong performance of the market in Australia has made property the country’s favourite investment class by far.

Your equity increases as you make repayments (forced savings)

As you make repayments your equity in the property (the property’s value minus the value of your loan) will increase. Eventually, you will repay your mortgage in full and will no longer have to make repayments.

The power of leverage

Equity in property can be useful. If you’ve got enough you may be able to refinance to buy more property to keep growing your wealth. Property is the only investment class in which most lenders will lend you money to buy.

Long term stability

When you own your home you have certainty that if you can make your mortgage repayments you will be able to stay in the home indefinitely. This provides a high level of certainty around your living costs going forward and makes it easier to plan for the future.

Freedom to change your home

If you don’t like any part of your property you’re free to change it, provided you can afford to and it doesn’t break any laws or local regulations. If it's done well, renovating can improve your home and add to its value.

Cons of Buying a Home

Opportunity costs

Opportunity cost is the loss of other alternatives when you choose one option. In the case of buying a house, the opportunity cost is the loss of the use of the money you put into your deposit, purchase costs and mortgage repayments.

If you hadn’t bought a home, these funds could have been put into shares, managed funds, a bank term deposit, a business, or any other investment which may (or may not) have earned you a better return than housing.

More risk

Buying a home can be far riskier than renting for several reasons:

  • If the property market crashes you could stand to lose a lot of money.
  • If you can’t make your mortgage repayments your lender could repossess your home.
  • You could unknowingly buy a home in need of costly repairs.

To minimise the risk of buying a property it’s essential that you are thorough when doing your pre-purchase due diligence.

Larger upfront and ongoing costs

Buying a home is much more expensive than renting. You’ll have to save a deposit equal to at least 5-20% of the property’s value, cover purchase costs, ongoing maintenance costs and mortgage repayments. If you ever want to sell your home, you’ll have to pay your agent’s commission, conveyancing fees and much more.

To give you an idea of the difference in cost between renting and buying here’s an example.

Example of buying a homeExample of renting a home

Average monthly rent capital cities (CoreLogic)

$1,760

Rental bond (4 weeks rent)

$1,760

Average property value capital cities (CoreLogic)

$647,414

Deposit amount (20%)

$129,482.8

Inspection costs

$750

Conveyancing fees

$1,000

Upfront mortgage cost

$600

Stamp duty*

$35,630

Extras costs (home repairs, home insurance)

$2,000

Monthly maintenance costs

$540

Monthly mortgage repayment**

$2,410

Total initial cost

$169,463

$1,760

Total monthly cost

$2,950

$1,760

*Example calculated based on VIC stamp duty rates. **Assuming a 30-year loan term and 2.79% interest rate.

Pros and Cons of Rentvestment

Rentvestment is a strategy that involves renting your home and buying an investment property. It’s becoming increasingly popular in Australia because of the high price of property in desirable areas and because it provides the flexibility of renting as well as exposure to the property market.

Rentvestment to purchase a home

Pros of Rentvestment

May be lower cost than buying a home to live in

When buying an investment (as opposed to buying a home) it’s much easier to be impartial and buy an affordable property. That’s because people are always emotionally invested in their home and often overspend, whereas investment choices tend to be more logical.

Gives you exposure to the property market

Rentvestment allows you to enjoy capital gains when property prices increase just as owning your own home would.

Allows you to live where you want

Generally, properties in the most desirable areas are much cheaper to rent than to buy. Rentvestment allows you to continue to rent wherever you want to live, instead of moving to wherever you could afford to buy.

Cons of Rentvestment

Can be risky

Just like owning your own home rentvestment can be risky. Make sure you buy a solid property in a good area, with a strong chance of increasing in value to minimise the risk. It’s also a good idea to search for property with a high rental yield as that will make covering the mortgage and expenses much easier.

Time and cost of managing the property

Owning and maintaining an investment takes time and costs money. You’ll have to pay property management fees, rates and body corp as well as carrying our or organising repairs and maintenance.

Why renting isn’t dead money

It’s often said that rent money is dead money but that’s not always true. For some, it may actually be better to save the extra money you would have put into a deposit and a mortgage and put that towards a more productive venture.

Renting may be the better option for you if:

  • You live in an area where property values are not expected to increase in future.
  • You are a business owner or entrepreneur who needs money to fund business ventures.
  • You travel or move around a lot and value flexibility above stability.
  • You would rather focus on investing in other assets like shares or managed funds.

The point is, buying isn’t your only option - it may not even be the best financial decision depending on your circumstances and goals.

Before deciding, think about what you want to achieve and what suits your financial circumstances and make a choice based on what’s best for you, not what everyone says is best.

Summary

Most Australians will at some point struggle to decide whether to rent a home or buy. Both can be great options and what’s right for you will depend on your unique financial circumstances and your lifestyle.

In summary, these are the pros and cons of renting vs buying:

Renting prosRenting consBuying prosBuying cons

Lower upfront costs

Less stability

Possibility of capital gains

Larger upfront costs

Lower ongoing costs

No forced savings

Equity increases as you make repayments

Larger ongoing costs

Less risk

Can leverage to buy more property

Can be risky

More flexible

Long term security

Opportunity costs

If you want the flexibility of renting but still want to build your wealth through property, rentvestment is another option you should consider. This strategy involves renting your home and buying an investment elsewhere.

Whatever you choose, make sure you look closely at your financial circumstances and think about your goals before you make a decision. Both renting and buying can be great options, it’s up to you to choose what’s best for your unique situation.

Renting vs buying FAQs

The answer to this question depends on your unique circumstances and goals. Read the above pros and cons and think about what’s most important to you to make sure you make the right decision.

Rentvestment is a property ownership strategy where you rent your home and buy a property investment elsewhere. It combines the flexibility of renting with the financial advantages of buying property.

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.