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Rent vs. Buy – which one puts you on top of the property ladder? - featured image
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Rent vs. Buy – which one puts you on top of the property ladder?

Our property markets have cooled from their peak, but housing affordability still plagues would-be first-home buyers.

Buyer borrowing capacity is shrinking with every Reserve Bank interest rate hike, which, combined with concern about where the market is heading has replaced buyer FOMO (fear of missing out) with a fear of buying too soon.

The question of whether to rent or to buy has never been more hotly debated.

Buy Rent2

Of course, there are some incentives for first home buyers - the First Home Loan Deposit Scheme, the First Home Owners Grant Deposit, NSW has given the option to avoid stamp duty and there is a New home buyer scheme to help frontline workers onto the property ladder.

But while property prices have cooled across the country… and they’re expected to keep going… prices are still significantly higher than pre-pandemic.

And many Gen Y’s are concerned that they may have missed their opportunity to get onto the property ladder altogether.

At the same time, Australia faces a rental crisis as national vacancy rates dip to the lowest point on record and rent prices surge.

So on the one hand, it’s an expensive time to buy because of mortgage serviceability and high property prices… but yet the rental market is under so much pressure that rental properties are scarce and expensive to secure.

So what’s the answer?

Which is the best way to go?

The truth is there are pros and cons for both options and ultimately, it’s up to you to work out whether renting or buying a home suits your personal and financial situation best.

But here’s a breakdown of the pros and cons for each.

The pros and cons of renting

There are several reasons that Australians might choose to rent rather than buy a property, and it's not all about the money.

Here are five of the biggest pros to renting your home.

Rent Pro

Renting: The pros

1. Flexibility

The most obvious advantage to renting is flexibility.

As a tenant, you can freely relocate from home to home and area to area once your lease expires.

2. Cost

Renting can often be a cheaper alternative to buying.

Particularly if like many young professionals you prefer the lifestyle and career opportunities that inner and near city locations provide.

Many young people can't afford to buy in these locations but can afford to rent there.

Even though rents are rising, more often than not your monthly rental payments will be less than what your mortgage repayments would be if you were to buy a comparable property.

4. Avoiding maintenance and repair costs

One of the big bonuses to renting is that you avoid costly maintenance, repair, rates, and insurance bills that go hand in hand with home ownership.

As a tenant, it’s your landlord who is responsible for taking care of such ongoing expenses.

5. No mortgage or interest rate rises to contend with

The Reserve Bank’s numerous interest rate rises this year are hitting the hip pockets of homeowners hard, especially when the cost of living is already sky-high.

Many homeowners are finding themselves put under mortgage stress, especially those who bought high-priced properties at the peak of the boom when interest rates were lower than ever.

Now their mortgage repayments are significantly more than planned (and budgeted).

But as a renter, this is something you don’t need to stress about.

6. No down payment needed

Unlike homeowners, renters haven’t needed to hand over their life savings in order to secure the property of their dreams.

Sure, there is a rental deposit, but at just 4-6 weeks rent that’s a far cry from the amount of cash needed to account for a 20% deposit to buy.

Rent Con

Renting: The cons

On the other hand, renting has many disadvantages.

Here are five of the most obvious ones.

1. Instability

In a rental property, there is no certainty about how long you’ll be able to remain in the property, and the home you have grown so fond of.

Tenants have very little say in how long they occupy a rental property.

Ultimately this is up to the landlord, who can ask you to move once your lease expires and can also terminate your lease early for a number of reasons.

2. The home is never really yours

When you rent, your property manager and the landlord can come into your property at any time, as long as they provide sufficient notice and have a good reason, such as regular inspections which can happen as frequently as every two or three months.

You also cannot make any changes to the property to improve your living space or even put pictures up on the wall without the landlord’s permission.

Rent Increase

3. The cost of rent is rising

Australia is in a rental crisis, with rental property demand far exceeding demand thanks to the lowest vacancy rates on record.

Even though renting may currently be the cheaper option, over the long term rents will continue to rise in line with the increasing values of properties.

4. Rent never stops

Unlike a home loan, which you slowly pay off over a period of time, rent never ends, whereas most people will pay off their mortgage within 25 to 30 years.

Regardless of how long you have lived in the property, you will always have to pay rent.

5. You’re at the mercy of your landlord

Similarly to some of the points above, because you aren’t the property owner, renters are at the mercy of their landlord.

Sure there are now many new regulations protecting the interests of tenants but landlords can legally increase your rental fee as much as every 12 months and, as long as certain conditions are met, they can evict you with relatively short notice

The pros and cons of buying

Like with renting, there are many pros to buying your own home.

Here are the top five.

Buying Pro

Buying: The pros

1. Stability

When you become a home, however, you have a certain sense of stability.

You choose how long you wish to live there (as long as you make your repayments!) and can make improvements to your living space as and when you like.

You also know how much your repayments are, and how long you’ll be paying them for (minus any surprise interest rate rise).

2. You build equity

Any payment you make to your home loan helps to build equity in your property.

And the same goes for making home improvements or doing renovations which could potentially add value.

And over time your home value increases.

You also have the option to draw down on your mortgage to buy another property or even make improvements to your current one.

3. Your home loan can be paid off

The best-case scenario may be that you pay off your home loan within the planned timeframe (usually 30 years) so you can enjoy your retirement without the added cost of paying rent.

4. It’s a stable investment

Owning a property is a good long-term investment.

Sure, the property can lose value in the short term, but if you buy well and maintain it, the long-term trend for property values is up.

5. You’re improving your credit score

With every payment you make on your home loan, you’re improving your credit score, unlike rental payments which don’t have any positive influence on your credit score.

6. You can take advantage of incentives

There are incentives for first home buyers - the First Home Loan Deposit Scheme, the First Home Owners Grant Deposit, NSW has axed stamp duty and there is a New home buyer scheme to help frontline workers onto the property ladder - which you can take advantage of as a first-time buyer in the current market.

Buying Con

Buying: The cons

But buying a property isn’t right for everyone and can come with some large downsides.

Here are the main cons of buying a property.

1. Less flexibility

Because of the costs associated with buying and selling property, as a homeowner, you have less flexibility when it comes to moving house.

Unlike renters, who can just move to a new rental as and when it suits them, the costs involved in buying a new home and moving are significantly more.

It costs about 4% of the sale price of your home to sell (agents fees, advertising, etc) and about 6% of the purchase cost to buy (stamp duty, government fees, loan establishment fees, etc).

2. You need a large deposit upfront

These days most lenders like you to have a deposit in the order of 20% of the property’s value.

The median property price in Sydney is $1.053 million, while Melbourne’s median price is $774,531 and Brisbane recently recorded a $746,017 median price.

That means you’d need a deposit of as much as $210,000 plus stamp duty to buy in Sydney, and you’d need around $155,000-$160,000 in cash to buy in Melbourne or Brisbane.

That’s a lot of cash.

And then you need settlement costs including legal fees and stamp duty.

Repair

3. You have to cover maintenance and repair costs

Given it’s your property, you’d obviously be the one responsible for paying any new or ongoing maintenance and repair costs on top of the cost of servicing your mortgage.

These costs can add up quickly.

4. You’re at the mercy of interest rate hikes

This is a biggie at the moment when the Reserve Bank keeps hiking interest rates to get on top of soaring inflation.

The fact is when a homeowner signs up for a mortgage they know how much they’re paying back, and how often, but what you don’t have control over is interest rates and how much each hike will cost you.

5. It comes with a risk

As with all investments, and property buying is an investment, there is always an element of risk.

Buy the wrong type of property in the wrong area, or at the wrong time, and you could find that your property actually decreases in value compared with what you paid for it.

The same goes with if you did a renovation or changed the home in a way that made it decrease in value.

Renting vs buying, it’s a tricky question… but here’s the good news…

Rentvesting as alternative

Rentvesting is when you buy an investment property first and then continue to rent the home you want to live in.

Over the years I’ve noticed a growing trend amongst young buyers who choose to get into the property market by continuing to live in rental accommodation where they want to live and purchasing an investment property somewhere else, rather than buying a home.

Here are the pros and cons of rentvesting.

Rentvesting Pro

Rentvesting: The pros

1. You get to have your cake AND eat it

Homeownership in the lifestyle suburbs they desire is expensive, but rentvesting means you can rent in a beachside or inner suburb location where there’s a café culture, restaurants, nightlife, entertainment, recreational facilities, and easy access to work and instead buy an investment property where you can afford to.

2. You get a foot on the ladder

Rentvesting also helps you to get a foot onto the property ladder.

Perhaps you’re living at home rent-free with your parents?

Rentvesting enables you to save and get a foot in the door of the real estate market.

3. It offers flexibility

If your lifestyle is still transient, you’re still planning to travel or you’re not sure where you’ll settle, it doesn’t make sense to plant your roots in property just yet.

And that’s the beauty of rentvesting, it offers the flexibility to get onto the property ladder without being tied down.

4. It’s tax-deductible

If you don’t see the burden of a large, non-tax-deductible mortgage on your home as the best use of your money, then rentvesting is for you.

Not only does it give you all the benefits listed above - flexibility, getting a foot on the ladder, having your cake AND eating it - the expenses involved in owning an investment property help you pay less tax.

From loan interest and bank fees to property management, depreciation, and even council rates, there are many ways that an investment property can be to your financial advantage.

Negative gearing is a tax strategy that Australians have been using for many years (if not decades) to make the prospect of owning investment properties more manageable and more profitable.

In simple terms, negative gearing takes place when you own an asset, in this case, property, that costs you more than you are earning from it.

Rentvesting Con

Rentvesting: The cons

1. Instability in the property you live in

As with any rental property, there is no certainty about how long you’ll be able to remain in the property, and the home you have grown so fond of.

Tenants have very little say in how long they occupy a rental property.

Ultimately this is up to the landlord, who can ask you to move once your lease expires and can also terminate your lease early for a number of reasons.

So even though you own another property elsewhere, your primary residence (being the property you rent and live in) is less secure.

2. No access to first-time homeowner incentives

Incentives for first-time buyers, such as the First Home Loan deposit scheme and First Home Loan Grant scheme aren't available to Australians who buy an investment properties.

3. You’re liable to pay Capital Gains Tax (CGT) when you sell

When it comes to selling an investment property, investors will need to pay tax on any capital gains made.

This tax isn’t applicable to buyers who buy a property to live in.

4. Risk

As with all property purchases, buying an investment property comes with risk.

Buy the wrong type of property in the wrong area, or at the wrong time, and you could find that your property actually decreases in value compared with what you paid for it.

The same goes with if you did a renovation or changed the home in a way that made it decrease in value.


Read more: Rentvesting Strategy in Australia - the Pros & Cons


Risk

But, isn’t rent money dead money?

Not necessarily.

I can see a good financial argument for continuing to rent and buying an investment property first.

Imagine you and I live on the same street, next to each other in similar homes each worth $800,000.

We both pay our home mortgages, rates, insurance, maintenance bills, and so forth out of our after-tax dollars.

Then one day I have a brilliant idea! 

I suggest that we swap homes and rent off each other.

I propose you pay me $800 a week in rent and I’ll pay you the same, so we’re cash flow neutral (the rental income I receive covers my expense of renting).

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Note: Sure I still have to pay my rates, insurance, maintenance, and mortgage, but now these expenses are tax deductible because I own an investment property.

Plus I’ll get the bonus of a further tax deduction on the depreciation of the property and the fixtures and fittings inside.

Of course, I’ll have to declare the rental I receive from you as income, even though I won’t pay tax on this, as my property outgoings are likely to be more than my income.

But the point I’m trying to make is that the sums are nowhere near as bad as most people imagine.

Now I’m not suggesting that buying your home first is ‘wrong’.

It’s still what most people will do because it’s a lifestyle decision and not a financial decision.

However, I know many successful property investors with significant portfolios of properties around Australia who still rent their homes and enjoy the financial flexibility this affords them.

When you choose to rent-vest, you may save money because you’ll be paying less rent.

Depending on the suburb you want to live in, you’ll likely end up paying less in weekly rental payments than you’ll be forking out in the combined mortgage, rates, and insurance fees every week.

Or, like an investor I know called Ashley, you may be successful in upgrading your lifestyle.

Ashley lived on the Gold Coast and snagged a renovated, waterfront four-bedroom home for $850 per week in rent.

When he checked its background, he discovered it had been recently purchased by an interstate landlord for $1.15 million!

Ashley was not in the position to spend $1.15 million on a house.

But he could comfortably afford to spend $850 in rent, especially since he was no longer spending a huge chunk of his income on a bulky owner-occupier mortgage.

His previous home was now rented out and he was leveraging the property’s income-producing status to enjoy a tax return worth several thousand dollars per year.

Questions

Questions to ask yourself before deciding whether to rent or buy

So, back to the original question, buying or renting, which is better?

There are a few questions to ask yourself which may determine the answer.

Am I in the position to take on a home loan?

When it comes to a home loan application, borrowers look at your income and assets, employment history, the volume of savings, credit score, your general outgoings including any liabilities, and even take the number of dependents into consideration.

So you need to ask yourself?

Am I in the position to take on a home loan and would you be approved if you applied for one?

Have you been in your employment for 6 months or more? Do you have a stable income? How about a sound credit score?

If the answer to any of these is ‘no’ then you’re probably not in the position to apply for a home loan.

Can I commit to the repayments?

So you’ve decided you’re in a good position to apply and be approved for, a home loan, but the next question is whether you can commit to it.

Home loan repayments don’t pause when they suit you, so if you’re thinking of a career change, quitting work and travelling the world, or even making a big purchase in the near future, you need to seriously think about whether you can commit to a monthly, and often costly, mortgage repayment.

Deposit

Have I got enough for a house deposit?

You might be in a good position to get a home loan, and can commit to the repayments, but if you don’t have enough savings behind you then you won’t be lent the money.

As a general rule of thumb, you want to have a 20% deposit saved plus stamp duty if applicable.

That can be as much as $210,000 plus stamp duty on an average Sydney property, for example.

Do you know anything about property investment? Or who to turn to for advice?

If you’re wanting to rentvest, do you know anything about the property market and property investment?

The bonus here is you don’t actually have to… so long as you know the best person to go to for advice.

You can trust the team at Metropole to provide you with direction, guidance, and results.

Whether you’re a beginner or an experienced investor you need an advisor who takes a holistic approach to your wealth creation and that’s exactly what you get from the multi-award-winning team at Metropole.

We help our clients grow, protect and pass on their wealth through a range of services including Strategic property advice, Buyer’s agency, Wealth Advisory and Property Management.

For how long are you planning to keep your property?

Are you planning to buy and ‘flip’ a property to make a quick buck (warning: this is risky business)?

Or are you planning to buy and hold until the value of your home or investment property organically rises?

The length of time that you should keep your investment property depends on the investment goal you have set for yourself.

It’s worth remembering though that any properties bought and sold within 12 months will be taxed at the full CGT rate.

Whereas, if you hold onto a property for longer than 12 months, you can cut your capital gains tax charge in half.

Also, the average time an investor will hold onto their property is 7-10 years.

Research

Have you done your research?

Successful investors know that smart property investments are acquired via a sound investment strategy, which is built through careful planning and research.

There are five essential ‘subjects’ you should do some homework on, in order to make it all the way to the top of the property ladder.

Your financial capacity and risk profile, your property investment team, your preferred property markets, the best property investment, and how much you should pay should be the key considerations.

When you know what property to look for, where, and how much to pay you’re ready to buy… and that goes for buying to live or buying an investment.

Am I settled and ready to lay down some roots?

It may seem an obvious one but being financially ready and being emotionally ready are two different things.

You might have all your ducks in a row and a decent downpayment behind you, but if you’re not ready to settle down and lay down some roots then you aren’t ready to buy your first home.

BUT.. rentvesting might be for you instead.

If you can accommodate the expense but don’t want the commitment or to move away from your lifestyle suburb, you should find out whether rentvesting is for you by speaking to an expert.

So which is better?

Rent, buy or rentvest… which is the best option?

Unfortunately, it’s not as easy to answer as it sounds.

That’s because it depends on a number of factors: your situation, your income, your finances, and your goals to name just a few.

If your finances are tight, you’re not ready to take the leap and buy and you don’t have the income to repay a mortgage, then renting is best for you.

If you have a deposit stashed in the bank, are financially secure, and ready to lay down some roots then buying could be a good option.

But if you’re wanting to get your foot onto the property ladder while maintaining a lifestyle elsewhere (and can afford to do so) then rentvesting might be your calling.

For us at Metropole, we think property investment is the key goal because it helps to get you the financial freedom that you want, need, and deserve.

Property investment can be an exciting way to build your assets, grow wealth and increase cash flow.

Investing In Property

But while many investors start out with the best intentions, only a few will ever make it to the top of the property investment ladder.

Why?

Some make some wrong decisions, others take bad turns.

There are several reasons NOT to invest in property, and there are several questions to ask before you do.

But by working out exactly what you want to achieve, a strategy to help get you there, finding the RIGHT property in an investment-grade suburb, and knowing who to turn to for guidance and help (we at Metropole can help you along every step of the way), you can find the best investment property and strategy to suit your needs.

When it comes to buying property, there are plenty of reasons to take action, but there are just as many reasons to hit the pause button.

If you’re not sure about your next move, speaking with a professional property advisor may give you the clarity and direction you need to move forward with purpose.

About Brett Warren is Director of Metropole Properties Brisbane and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their build their wealth through property.
13 comments

If you were a young career driven person, I can see many pros to renting in the capital city you work. Especially with relocating cities due to a promotion very probable. I never thought about rentvesting before, but what a great option it is. I won ...Read full version

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Well, both options come with advantages & disadvantages. Renting allows for a more flexible lifestyle, not tying you down to one place for very long. It also gives you the freedom to not have to worry about bigger maintenance issues. On the other ...Read full version

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I like that you mentioned that it may be less expensive to rent rather than buy in and near the city. I just got a job in a bigger city and I really like the idea of living in there with all the opportunities and things to do, but there's no way I c ...Read full version

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