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 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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
Buying a home can be far riskier than renting for several reasons:
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 home||Example of renting a home|
Average monthly rent capital cities (CoreLogic)
Rental bond (4 weeks rent)
Average property value capital cities (CoreLogic)
Deposit amount (20%)
Upfront mortgage cost
Extras costs (home repairs, home insurance)
Monthly maintenance costs
Monthly mortgage repayment**
Total initial cost
Total monthly cost
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.
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.
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.
It’s often said that rent money is dead money but that’s 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:
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.
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 pros||Renting cons||Buying pros||Buying cons|
Lower upfront costs
Possibility of capital gains
Larger upfront costs
Lower ongoing costs
No forced savings
Equity increases as you make repayments
Larger ongoing costs
Can leverage to buy more property
Can be risky
Long term security
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.
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.
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.
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