It’s the question many tenants ask themselves – do we continue to rent, or is it time to purchase a property?
There can be advantages to renting a property. For one, your monthly outgoing expenses will be less than if you purchase. You don’t have costs such as insurance, rates and taxes, and the maintenance that goes with owning a property.
You also have flexibility. If you decide to move you can do so once your lease has run its’ course, or is terminated.
But that’s about where the benefits of renting a property end. The reality is that, when you rent a property, you are paying towards the cost of someone else’s asset. That money is an expense, never to be seen again. I know of clients who have rented property for decades and have absolutely nothing to show for it.
Contrast that to purchasing a property. To stay within your budget you would probably have to purchase a property that is inferior to one that you could afford to rent. It would be inferior in the sense that it may be smaller or need more work, or perhaps be in an area of lesser value than the rental property you could afford.
By compensating in this way you will free up enough in your budget to cover the costs associated with owning a property, such as the maintenance, in addition to the cost of servicing your mortgage bond.
It’s important to realize that you will also need to have funds available to cover the cost of purchasing, such as transfer duty and lawyers’ fees, and bond registration costs. It may be possible for you to obtain a 100% bond, but if not, you would also need a deposit.
In working out your budget it’s also important that you allow for an increase in interest rates of at least 2%. By doing this you will ensure that, when interest rates increase, you can cope with the additional installment on your bond.
As a property owner, you will have the satisfaction of knowing that every single installment you make on your bond allows you to own an asset that, in most markets, increases in value each year. Even with the global financial crisis of 2008 property values over the past 10 years have increased handsomely.
The result is that you will own an asset that increases in value, with a liability (your bond) that decreases. The difference at the end of the day represents your wealth. Your monthly costs are not purely expenses – they become an investment in your asset, which will yield you a respectable return over time.
After 20 years, when your bond is paid off, you will own a property worth considerably more than you paid. And there is nothing like owning your own home. Contrast this to the tenant who paid rental for 20 years and has nothing to show for it. Which would you rather be?
Principal, Harcourts Platinum