# Renting vs. buying shares



## prawn_86 (7 October 2007)

Ok I know what your thinking..._not another property thread_

Me and my partner live in North Adelaide, which is an awesome suburb to live in. Close to everything, good culture etc etc. We pay $220 per week for a 2 bedroom apartment. While not huge it is all we need and we are happy with it.

I know for a fact that an apartment in the same complex just sold for $250k, meaning that rent of 220pw would not cover the mortage.

my theory is this:

over the long term (ie the rest of my life), it seems i would be better off renting a property at say 75% of what it would cost to pay off the mortgage. So as our income rises, we could move into more expensive places, providing the rent is less than what the mortage would be. 

On top of that you get to live in a better area than if you were paying the same amount off a mortage. in fact for us personally we probably couldnt even own any house paying only 220 a week

then with that extra 25% that I would pay if I had a mortage plus what you would pay in maintenance/body corp etc, invest into shares, even bluechips with a solid div yield, and in the long run I would end up with a better investment than if I bought a property. 

The cons of this are never having a secure place to live, as there is always the threat of having to move. 

I think it also depends on your long term view of property prices. If property prices appreciated as they have in the last 10 yrs then property would prob be a better investment, but I don't think it will keep appreciating at such a rate, and a slowing has already been shown.

Are there any ASFers out there who rent for this reason, or do you all own/aspire to own property?

What do current property holders think of this strategy? Assuming my situation not your own if you bought years ago. (Tech/A i would like to hear your comments as I know you are involved with property).

Opinions appreciated


----------



## explod (7 October 2007)

I have sold out of real estate over the last two years and now rent where I live.   Yet from 1968 property was very good to me.    Some 7 years ago I read "Rich Dad Poor Dad" and some other follow up books by Robert Kiyosaki which has since made me measure everything in what it will return.   So like you, I think renting is best at the moment.   But everything is part of a cycle and on the financial clock there will come a time to get back into my own place again.

Most people will still say that property is still going up.  I think that is wearing thin now, at best it is level, in some areas dropping off a lot.  A few elite top of the range sales are still keeping a lid on what you and I realise.  

If you invest the extra money safely but in the big trend items in their time, now food and resources, it will compound so that when it is time to buy your home you may surprise yourself on the upside.


----------



## battiwallah (7 October 2007)

If you look at the arithmetic you are correct in that you will be ahead in the long term.  It requires discipline though and that's where most people get unstuck.  Those paying off mortgages don't have a choice regarding regular payments which is why most people are better off with this form of investment.  The average person has no idea about investing (unfortunately) and doesn't understand the power of compound interest and how it can work for them.  Therefore such people are better off with this structured and inflexible form of investment.  It is ideal for them.

If you have the discipline to make those payments and never be tempted to miss one or two then you are just about certain to be better off.  You mentioned a few disadvantages, like not having a guarantee of a stable address and that's something you'd have to adjust to.  

Liquidity can be an advantage but also a temptation.  This is where discipline comes in again.

All in all, I'd rather have my money working for me than me working for my money and if I had my time over again, I'd certainly rent and let a landlord subsidise my living expenses.  Note that in NSW the govt is considering changes in the regulations that will move the balance back towards the landlord somewhat, like requiring tenants to pay water rates and so on.  This may alter the numbers a bit.

Cheers.


----------



## Judd (7 October 2007)

I'll ignore all the numbers.  When you own or a buying your own home, the intrinsic value of closing that door behind you and saying "I am home" is not one that can be measured.  Agreed, it is a state of mind.  Agreed, that numbers can prove that renting may be better.  Agreed, that it can probably be proved that you may have paid too much for the house/apartment/unit.

In my view, and it is only my view, you buy a house so that you can live in your home.  No more, no less.  After that, numbers do not matter.


----------



## Julia (7 October 2007)

Judd said:


> I'll ignore all the numbers.  When you own or a buying your own home, the intrinsic value of closing that door behind you and saying "I am home" is not one that can be measured.  Agreed, it is a state of mind.  Agreed, that numbers can prove that renting may be better.  Agreed, that it can probably be proved that you may have paid too much for the house/apartment/unit.
> 
> In my view, and it is only my view, you buy a house so that you can live in your home.  No more, no less.  After that, numbers do not matter.




Completely agree, Judd.  And it's not really just a state of mind.  The sense of security in knowing no landlord can tell you to get out is immeasurable.


----------



## theasxgorilla (7 October 2007)

There is always at least two ways to look at something to get a positive perspective.

I think that as long as its practicable one should aim to be as mobile as possible.  If you have a big goal, like your own HOUSE in good area, don't let yourself put roots down or become too comfortable until you've attained that goal.  While you're young and have the fire in your belly use it.

I've moved on average every 18 months since I was 21 (nearly 10 years ago, no wonder I feel tired!), buying apartments and units and now finally a house as I go, renovating for profit.  It is time-consuming and starting off by renovating in a little apartment and living in it at the same time is a form of hell.  But on the positive side you are gaining access to something that you can't do as a renter.  

The ability to _profitably_ add value to the property.  They've just opened a big IKEA in Adelaide haven't they???  Jump on it and take advantage of the opportunity before the big profit is arb'd away by everyone else in your city doing it.  The capital gains tax exemption on primary places of residence make this strategy about as tax-effective as you're ever gonna get ie. tax free.  If you are a first home buyer expect a leg-up there as well to compensate you for stamp duty.

It is possible to maintain a share portfolio using a longer term method while you do this so the question doesn't have to be one OR the other.  That question might exist now due to capital constraints but do this well once or twice and you won't have to decide to do one or the other, you can do both.

Renting works well if you have something else going on, like a lucrative business or you trade full time for a living and would struggle to fit your time table together with not having a shower for 6 weeks while your reno the bathroom etc.

Just some food for thought.  IMO, renting is a good solution for saving since as you have recognised its possible to live well in a good area without the overheads of owning.  Plus there are other benefits to living in a good inner city area like cheap commutable distances to everything sometimes resulting in very low ongoing car/taxi/public transport costs.


----------



## prawn_86 (7 October 2007)

theasxgorilla said:


> Plus there are other benefits to living in a good inner city area like cheap commutable distances to everything sometimes resulting in very low ongoing car/taxi/public transport costs.




thankyou ASX.G, i always appreciate your input. what you mentioned above is also another reason we live where we do, i just forgot to mention it. I do own a car, because im originally from the country, but nowadays it sits in its park and does about 20km per week. petrol prices dont really affect me 

Judd and Julia, they are fair points you raise and i do agree. however, if you rented all your life, would you know the difference? ie - if i never own a home i will never know what it is like, and therefore it will not be of any loss to me.

im not saying what is right or wrong, im just interested in everyones thoughts


----------



## Smurf1976 (7 October 2007)

It comes down to what you want to spend your money on in my opinion. There's no point making a fortune only to end up living in poverty whilst the $ pile up in some account.

Many other common things could easily be viewed the same way. For example:

Nobody needs to ever drink beer. Water is cheaper and better for you. Drinking beer is totally illogical from a financial perspective.

Nobody needs a big TV. We all lived perfectly well until very recently without them and I don't recall anyone complaining that a 63cm set was too small 20 years ago. Taken to the extreme, you don't actually need a TV at all.

Renting a seat on a bus for an hour each day is generally a lot cheaper than owning even the smallest car. Many households don't actually need a car at all and most could survive perfectly well with a single 10 year old 4 cylinder with manual transmission and no air-conditioning. But stand on any street corner and just watch $ millions pass by in 4WD's that never go off the bitumen and Jap imports with a fortune spent to make them look different. It's a personal choice but financially it makes no sense.

What sort of monitor are you reading this on? If it's anything more than a 15 inch CRT then you've spent more than you needed to. Nothing wrong with that, it's a personal choice, but it wasn't long ago that we all survived perfectly well without LCD's.

Own a mobile phone? Anyone over 30 will remember quite well when the very concept was science fiction. Most will also rembember quite well realising that it wasn't that often that anyone really _needed_ to make a phone call when not at home / work / near a phone box therefore it wasn't really necessary for anyone to invent the mobile. If it was ever invented then the only obvious use was to leave it in the glove box in case the car broke down - you certainly weren't going to carry the thing around with you all day.

There is now close to one mobile phone per person in this country, that's more than one for every adult, and a large portion of those don't make a profit for their owners. People choose to spend money on them however and it's increasingly seen as somewhat weird not to own one - much like how smoking was viewed 50 years ago.

On the subject of smoking, that too is completely pointless in a financial (and health) sense. Many still do it however and quite a few would have taken up the habit for the first time today alone. A total waste financially, clean air is free, but many still choose to do it.

Ever bought bottled water? Probably the most pointless product ever mass marketed when better quality (and far less polluting to supply) water has long been available at a far lower price. Hasn't stopped it becoming popular though.

Have air-conditioning at home or in the car? It wasn't that common in most parts of this country even in the 1980's but I don't recall too many complaining at the time that they didn't have it. With the exception of Tasmania where it's usually installed as a means of saving power for heating and not used in summer, A/C isn't a wise financial decision for most as just putting up with the heat would be cheaper. That didn't stop it being a rapidly growing industry in recent years however.

Buy a house? Financially it's probably not the single best way to make money. But many choose to do it for the same reasons they drive a car, drink beer or own a mobile phone. They are willing to sacrifice some profit in order to obtain some other benefit.

Personally I'm buying a house right now (if these damn real estate agents sort out their arguments - see the thread I posted on that if you want to know details). I'm not buying for financial reasons but rather for personal / lifestyle reasons. If it makes a profit then so be it but to be honest I wouldn't really care if its value doubles or halves - it's a place to live not an investment. I'll be keeping a reasonable portfolio of shares for investment purposes.


----------



## CanOz (7 October 2007)

explod said:


> But everything is part of a cycle and on the financial clock there will come a time to get back into my own place again.
> 
> 
> If you invest the extra money safely but in the big trend items in their time, now food and resources, it will compound so that when it is time to buy your home you may surprise yourself on the upside.




Finally someone else who sees the cycle and the point that we are at now....anyone know whats next?

Cheers,


----------



## resourcesman (8 October 2007)

Another point is that rent is not tax deductible, whereas the income you earn on your shares is taxable.... that means that you need to make at least $220/(1-your marginal tax rate) per week on the $250k to make it better to rent and invest in shares instead of buying. It should be significantly more than that amount because you are taking more risk.

Not sure if anyone said this already, cos i didnt have time to read the replies, so my apologies if it has


----------



## Julia (8 October 2007)

prawn_86 said:


> Judd and Julia, they are fair points you raise and i do agree. however, if you rented all your life, would you know the difference? ie - if i never own a home i will never know what it is like, and therefore it will not be of any loss to me.



That's an interesting question, Prawn.  Honestly it's one I've never considered.
My parents and grandparents always owned their homes so I was brought up to consider that the norm.  Got married, had our own house from the start having both worked three jobs and saved before that (plus houses were easier to own then).  Rented briefly after leaving the marital home and found myself doing stuff to the place which benefited the landlord.  As soon as I could scrape up the deposit, I bought again.  It's quite a difficult thing to explain but has something to do with a sense of pleasure/pride in having turned a basic chunk of land plus a pile of bricks into something which makes me smile every time I turn into the driveway.


----------



## prawn_86 (8 October 2007)

My family have also always owned their own home, plus rental, and business properties.

I must admit that i do enjoy getting 'home' after a holiday or something, and although we dont own it it is still nice to get back to a space we have set out like we want. Although i tend to believe that you can make any space a home if you need to, but owning would give much more security.

Smurf, im sure i detected a hint of sarcasm there  but at this stage in life i have no desire to own a home, and would rather have a big tv and rent, than pay off a mortage. not really the aussie dream i guess but thats just me


----------



## Happy (8 October 2007)

People who rent are needed at least for ones who have property for rent, and if they feel good about even better.


----------



## sam76 (8 October 2007)

As my old man always says

"you can't live in your shares"


----------



## robots (8 October 2007)

hello,

plenty of people with real life experiences regaring owning property, but you will find it very difficult to find someone who has rented for 5 yrs, 10 yrs or 15 yrs and has out done buying your PPOR

the only one I know with evidence is a gentlemen by the name of Phil Ruthven, from IBISWORLD

as others mentioned discipline is the key,

prawn I think you can have both, after around 6-8 yrs of home ownership, rent will catch up to the cost of ownership, what then? thats when the home owner excells for the rest of his/her life

thankyou

robots


----------



## prawn_86 (8 October 2007)

admitedly in the past property has performed well, and you would have struggled to beat it following this theoretical strategy of mine.

but going into the future providing there is not another property boom i think it has potential. you mentioned when rent catches up with the cost of ownership, can you elaborate on this further? i presume you mean reduced mortage payments?


----------



## robots (8 October 2007)

hello,

didnt the RE boom end in 04?, yet people have had some great increases of late

rents increase and eventually catch up to what it costs to own the home

your stradegy is perfectly sound, you just have to do it

who was buying shares in 00 or 01?  

thankyou

robots


----------



## cuttlefish (8 October 2007)

prawn, as robots is alluding to and a lot of people looking at the rent vs buy equation forget is that rents rise over time. Particularly when property prices are flat, thus meaning developers aren't scrambling to provide new supply, the rental demand and rental vacancy rates reduce thus pushing rents up. (this is happening in Sydney lately where its been a flat property market for a few years).

You are paying @220/week now and based on the $250k price to buy the equivalent place, you'd be paying about $340/week in interest on a loan @ 7%.

In 7 years, if rents rise by say 6% per annum your $220/week rent will have risen to around $330/week rent.    So at that stage you are pretty much break even.  Your interest payments are on par with rent.  So for the rest of your life after that you are ahead.  (e.g. 40 years or more)

Note also on a mortgage if paying P&I your interest bill would actually be falling (I'm assuming static interest rates of course but this is theoretically achievable by locking in a fixed rate).

In 20 years time your rent could have risen to $1000/week while your loan will be likely paid off - but even if you had an interest only loan you'd still be only paying $330/week.


----------



## prawn_86 (8 October 2007)

ok thanks guys, this makes sense now.

just curious about it all, as i have no real desire to own my own home, as i have previously mentioned. this might change if i was to have a family though


----------



## Siraitken (8 October 2007)

/bump


----------



## nomore4s (8 October 2007)

I think Robots has a good point, rents will keep rising but the homeloan should be pretty much stable depending on interest rates of course but the big advantage with home ownership would be when the property is paid off, then the costs will be minimal compared to renting as well as any capital gains made in the time it took to pay off the loan. Something to think about anyway.


----------



## Happy (9 October 2007)

Even if money would be gainfully employed in making money for rent, you have to include tax component.

Say rent is $220 but to have $220 after tax of say 32% average,
you have to earn $324 –32% = $220 roughly.

The same can be said about money frozen in the house as cost of lost opportunity, should the money frozen in the house be used for alternative money producing investment.

Effectively everything is boiling down to preference, plus of course peace of mind in case you own the property and do not have to move just because somebody pulled the plug on you.


----------



## tony montana (11 October 2007)

what i comes down to when you buy a house/unit is are you buying a home or a investment.......if you are buying a home the dollar value doesnt come into it as far as i am concerned.when you decide that this place is it, the place where i will bring my kids up, and the place where they bring your grand children too.....it doesnt matter what the real estate market is doing and what houses are worth or the interest rate....the thought of ever selling up will never go thru your mind.i feel that renting even if it out ways the cost of buying your own home doesnt appeal to me.there is more to it then weighing up the cost...i hope the great aussie dream never fades or gets out of reach for the starters.


----------

