Should I Rent or Buy a House

Posted on 20. Nov, 2012 by in Creating Wealth

There is a lot of romance and emotion involved in buying your own home and a lot of practicality and justification involved in renting instead, but is there really a right and wrong decision? The fact is that there is often no right and wrong answer, but you personally might be better suited to one over the other, which is really all that matters in the end.

In this post we are going to look at the benefits of renting or buying a house from both a personal and financial perspective. Depending on your approach, you may find that once suits you far better than the other.

The financial cost of renting and buying

Although many people will tell you that renting a house is cheaper than buying one, there are a lot of variables that need to be considered before accepting such a broad statement. It can be more difficult to get a property loan these days, but there are still some very attractive incentives available to first home owners in Australia if they choose to go down this path.  What that means is the direct cost of owning a home may be very close to renting one, depending on where you want to live.

One advantage of a mortgage is that it’s a form of enforced savings. You can absolutely do the same thing renting; by investing the difference between renting and owning, but this takes a certain amount of commitment and will power.  For many people the potential to divert funds to other interests (things that make us feel good immediately) is a heavy influencer, so you need a lot of self discipline as a result.

If you struggle with saving money and plan to stay in one place for a decent amount of time, then buying a home might be a good way to go.

Unfortunately this doesn’t work for everyone, let’s say you want to buy a house in Perth.  Western Australia has gone through a huge mining boom in recent times and housing prices have increased as a result.  According to recent statistics, the average Perth family now needs 6.5 times their annual income to purchase a home, compared to 3.9 times 10 years ago.  The rent in Perth is also very high, but once you get to those levels, even a small difference between renting and owning makes buying a home very difficult.

Perth is an extreme example, but you can find similar situations in many popular suburbs around Australia and other parts of the world.  It is likely that buying a house in these areas will be challenging, but strangely enough renting often becomes a lot more attractive.

Although there are many exceptions to the rule, the rental yeild for a property will often run at around 5% of the total property value, which is a handy little thing to know as an investor.  This only works up to a certain point however, which is where things get interesting for renters.  Generally speaking, the more expensive a property gets, the lower the rental yield becomes.  So while a $300,000 property might cost you around $300 per week to rent, a $1,500,000 property might only cost you $1,000 per week.

Ok, we are still talking some pretty serious rent, but that kind of money would generally buy you a home valued at around half the price.  Therefore if luxury is what you are after (and you have the income to afford it), then renting might suit you down to the ground.

The personal benefits of renting and buying

Renting or buying a house is as much about making personal decisions as it is financial ones. Having a large debt can cause a lot of stress and financial hardship plays a very big role in relationship problems. On the flip side the uncertainty of whether you lease will be renewed, and having to regularly pick up and move may also cause a lot of worry that can often flow on and affect other aspects of your life.

Buying a home is almost always an emotional decision. You fall in love with a house, a street, or a neighbourhood and can’t picture living anywhere else. Sometimes it can be a practical decision based on the view that you don’t plan on moving, want a stable place to live and like the idea of being able to do whatever you like.  If you like stability, and are in a good financial position then buying a home might be a good personal choice.

Alternatively you might like the idea of travel and flexibility. Maybe you just aren’t ready for a large financial commitment, or have a preference towards investing your savings in shares rather than property. If flexibility is really your thing and you are in a constant state of flux, then renting might be a good  decision for you personally.

Ultimately these are your personal choices and while they aren’t often given as much attention when people talk about renting or buying a house, they are just as important as any financial decision you make.  If you consider both your personal and financial situation when deciding to rent or buy it is very likely you already have the answer that you are looking for.

So which one are you?

Image by Images_of_Money

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