We have all heard both sides of the argument between owning a home and renting a home. You would have all experienced loyalists to both sides of the argument passionately lecturing you about why their side is superior to the other. It all comes down to what it is you want to achieve, and above all else, peace of mind.
It is an interesting phrase, peace of mind, often referred to as a sleep at night factor. The Collins Dictionary defines it to mean ‘the absence of worry’.¹ Whenever making a decision in life – financial or not – I believe the criterion we should give the most weighting to is whichever option gives you the best sleep at night. There is no point making a decision and lying in bed at 2am every night worrying if you made the right one or not. That is not what life is about.
Circling back to the argument of renting a house versus buying a house. Each side has its own logic and merit, there is no doubt about that. A house is a lifestyle asset so we need to be prudent in ensuring the costs associated with owning or renting one does not adversely affect our lifestyle too much. Let’s break down some advantages and disadvantages of the two, and I will focus on living in the Geelong area as a reference point.
When you own your home, the first thing people realise is a sense of stability. The home is now yours, and provided you have no issues repaying the mortgage, it is very difficult for anybody to take it off you. Although, it can be done², think ‘The Castle’.
What’s more than the sense of stability is the emotional attachment you have with your home. This is often deemed priceless. Most people would have memories of their family home growing up. Because you own it, you can do what you like, such as drawing a height chart on the wall that you add to on your children’s birthdays, renovating, putting picture frames wherever you like, and if you’re lucky, you could even put a pool in.
Arguably, the most valuable aspect of home ownership is the opportunity to use the equity you potentially own to invest for the future. For this opportunity to become beneficial, you have either got to paydown the principal of your mortgage significantly, or are lucky enough to own a home in an area that has experienced large capital growth. The lifestyle on offer in the Geelong area is envied all around the world, which has lead to capital growth in recent years. So much so, they have developed a new estate in Armstrong Creek. The demand for homes in this area is so strong, that the average time a home listed by local agent, Armstrong Real Estate, spends advertised on the market is just 16 days. This estate is situated only 10-15 minutes from the Geelong CBD and numerous coastal beaches, what a great lifestyle that would be? If owning a home and having this sort of lifestyle sounds decent, at Income Solutions, we can help assist implementing the strategies necessary to ensure you can lead your desired lifestyle and still get a sound nights sleep without any worries.
Of course, as Gary Ablett now knows, the value of your house can just as easily drop³. There are risks. They do not always go up in value, and, as the owner of a mortgage, you are a slave to interest rates. Interest rates are an obvious issue and can affect your peace of mind. They’re currently quite low, however, they are on the increase. This can cause severe financial stress (4) and is something you’re unlikely to experience whilst renting. On top of rising interest rates are the costs of owning a home. Rates, insurances, maintenance, stamp duty when buying etc. These all add up and it is mandatory to allow for these kinds of costs in your annual budget before making the decision to buy a home. Remember, planning for these can still give you great peace of mind.
Alternatively, there is the option of renting. Viewed with a lot of unfair stigma in this country, renting can be seen as ‘dead money’. I agree, to an extent. In most cases, it can be cheaper to rent a house than it is to buy it. You can live in an area that best suits your lifestyle at a cheaper price. The demand for rentals in the Geelong area is also booming due to the lifestyle on offer; the supply of homes cannot keep up with the demand. Armstrong Real Estate lease out advertised homes in an average of 7 days, such is the popularity of this area.
A prudent renter should use the cash they save on their dwelling and invest this for their future. It is when this cash saving is simply squandered on lifestyle that rent does become dead money. Everybody’s favourite finance commentator, The Barefoot Investor, says in his book that if a person rented the same house their friend had bought, invested the difference in their associated costs, the renter would be in a better financial position in 20-30 years time. True, for the most part.
Another aspect of renting is the flexibility. This can also be seen as uncertainty. If the freezing winter’s of Geelong become too much to handle, it is very easy to simply sign a new lease and move to a place like the Whitsunday’s, not needing to worry about the extremely lengthy time it can take to sell your home. The other side of the same coin is also very real. A family of 5 receiving a letter from their property manager telling them they have 30 days to vacate the premises is surely going to cause a few sleepless nights. If the potential of this happening to you as a renter causes you severe angst and little-to-no peace of mind, then renting is probably not for you.
Personally, I understand that owning a home will cost me more money than renting one. Unfortunately, this country does not offer 10-20 years leases like other countries of the world(5). Therefore, I currently rent, with the goal to own a home in the near future for two reasons. Primarily, I would like to buy a nice little acreage around Geelong. These types of properties are hard to come by as rentals, and I would like to have full control over it. I am aware of the opportunity cost and it is a risk I am willing to take. Secondly, I plan to use the equity I build in my house to invest in my capital base. I will turn my bricks and mortar into an asset, and have it earn me some cash, rather than force me to spend cash on it.
The basic thing is I have a plan. This plan is what gives me peace of mind. At Income Solutions, we can help you create your plan, and, with a bit of luck and forethought, some decent peace of mind as well.