Buy to live or Rent ?
A time immemorial discussion …
Time has gotten the best of us and with current values of property you will be unpleasantly surprised !
“What if you knew that to buy a $600,000 property to live in will cost you just shy of $2 000 000 ($2m) over the next 30 years would you buy it today?”
Yet, most would ask “are you still renting, why don’t you buy yourself a house already?” Followed by ” Don’t you know Rent Money is Dead Money!”
We ask “IS IT?” OR can you do better with the same money elsewhere?
First we will talk through the money involved, removing the emotion of owning
Taking out a mortgage to buy to live
Today, we all agree that buying a property has gotten very expensive, even with lower interest rates and possible First Home Owners Grant.
But how much does it actually cost to buy a house and to try pay it off over the next 30 years or so?
Well we are all a little different so a little generalisation is required : we assume you put down a deposit of 20% on a $600k home. Meaning you need $120k for the deposit + $35k for buying costs (stamp duties, conveyancing fees etc) AND probably an extra $30k to $50k to fix it up to your own livable standards
Assuming an 80% Loan of $480k and an average of 7% principal & interest, over the coming 30 years. Using a mortgage calculator we will be paying $3,193 per month of Principal & Interest. This calculates at a whopping $1 153,243 to service this loan over the 30 years. Crikey!
Not only this but you end up paying more in interest ($673k) than you do for the whole actual loan amount ($480k). That’s a double Crikey!
Once again we are told that rent money is dead money, right? Well you just spent $673,000 on real ‘dead money’. Take a moment and think about it
I know it is difficult but if we break that up, the interest alone, over the 30 years works out to be $429 per week or $1,861 per month … you can certainly rent a really great place and where you want to live, for that kind of money you would agree
But instead, you have chosen to buy a home and you are thus paying a ****bucket load of money a month just to service the privilege and emotion of owning. For most this is a significant part of their monthly budget which impacts on one’s lifestyle and also result in delaying your own financial planning goals to secure your future
To add it up :
- $120,000 deposit
- Purchase costs $35,000
- Cosmetic upgrade $35,000
- Servicing the loan for 30 years $1 153,243
- Interest $670,000 and Principal $480k
WoW!! That is a significant $1 343,243 paid out over 30 years
Now throw in the annual upkeep of your home such as :
- Rates and Taxes
- Home Insurance
- Body Corporate (if applicable)
- Maintenance (things break)
For the above running costs, the RBA estimate that on average the running costs for a dwelling is 1.5% of its value, meaning that is another $270,000 over 30 years to keep a $600k home up and running
Add this to your current total of $1.35m and we are now up to $1.6m just to own your dwelling you bought for $660k
Again we hear that buying a home will make you money. Huh? Can you (hand on heart) say that taking these numbers into account that you are making money? Meaning is buying to live really an investment?
If you just invested the amount you deposited, plus are paying off on the home loan, plus the ongoing running costs every month, compounded over the next 30 years, at even just 5% interest, you would have $3 823,551 in a savings account
What if you Invested this in an Investment Property Portfolio? Dare we say you would have a significantly higher amount
What about my Capital Growth?
In going back to your $600,000 property which has cost you $1.6m to own over 30 years, we can estimate capital growth at 5% pa compounded, meaning your property might now be worth say $2.593m
Take this $2.593m less costs to purchase of $1.6m and you are left with $980k in your hands … now compare this to a savings account with just under $4 million in it OR a property portfolio worth significantly more than this. You cannot compare can you?
Put all emotions aside, ask yourself “Does it pay to buy to own?”
Cost of Renting
Aside from the so called inconvenience of renting and having to move if you lose the rental; can we look at the figures?
Take the same property valued $600k and you will probably be paying around 4% of the value of the property as rent. That equals $2,000 per month
If rent escalates by say 1.5% per annum and you stayed in the same property for the same 30 years (to compare apples with apples of course) it would have cost you $908,594 to live here maintenance, rates and mortgage costs free
Compared to owning the property costing you $1.6m you have saved a whopping $704,649!
What would you have done with $704k in your own pocket over these 30 years?!?!
Or Invest being a Rentvestor
Once again, if you used only a small proportion of this $792k and invested in property by being a Rentvestor you and I know you would have a lot more wealth in your own pocket than buying to live
Now that you have worked it out, what will you be doing about this?
Basic Example :
Think about it : If you secure 3 x Investment Properties of say $450k each where you were able to put down a 10% deposit on each ($135k total) and your portfolio grew by 5% compounded, you would have $968 000 of pure equity in your portfolio using an interest only loan of 5%. Your initial $135k investment could be working hard for you at around 30% pa where your tenant and the tax man have paid most or all of your holding costs on your behalf. That could be $135k = just shy of $1 million dollars (compared to owning where you paid $1.6 million)
*naturally facts and figures will change according to your particular circumstances, purpose of this blog is to demonstrate the overall concept and give you something to think about
Comments or questions are welcome.