Buy your house first or last?

[tech/a]

as one ages though the mind is willing but the body doth protest too much.

Wisdom is meant to come with age---so Ill go with that.

Supply wisdom and employ willing bodies!
That's how I do it!

 

[sinner]

but in the end, renting is dead money

I hear this crap spouted all the time but what does it actually mean? It means nothing, it's nonsense.

I pay money to live in a domicile. Unless I miss out on the domicile bit, how exactly is the money dead? It fully and capably achieved its purposes of providing me with 4 walls and a roof! I find it so strange, like saying that bus ticket money is dead money. All I wanted was to get from point A to point B today, so I should spend $20,000 on a car.

Most Australians are completely sheltered in this perception, if you go to Europe you can see the renter:landlord ratio is essentially the inverse of what it is here and people hold the much more sane perception of merely paying for the cost of living expenses.

One could argue that having to pay $200,000 (interest + principal) over the life of a $100,000 loan is dead money, but the joys of a property bull market and resulting theoretical capital gains have saved most from having this realisation.

 

[kid hustlr]

Example of what I'm getting at

Surely it's all numbers?

Changing the assumptions (especially perceived after tax return) to fit your situation, then decide which is the better option?

I might be way off here and missing plenty...

 

[kid hustlr]

One could argue that having to pay $200,000 (interest + principal) over the life of a $100,000 loan is dead money, but the joys of a property bull market and resulting theoretical capital gains have saved most from having this realisation.

Agree with this - in the ends its an opportunity cost.

As I said, interested in your brain's view of my quick lunchtime example

 

[skc]

Kid,

As per most of these type of questions... there is no one correct answer. There are some facts and there are some perspectives which makes the "right" answer unique to different people.

Here are my random views...

1. From a cashflow perspective, renting is almost inevitably cheaper than owning a property. You need to take into account both the cost of capital (which may be the mortgage rate or the opportunity cost, depending on how you finance the property) and the cost of ownership (rates, insurance, land tax, upkeep etc) which are significant.

2. There are frictional costs associated with property transactions. When you buy you pay stamp duty, lawyer fees, bank fees, building inspections etc etc. When you sell you pay lawyer fees, marketing costs, agent fees etc etc. These transaction costs can easily be 3-6%. So when you see the "median" house price is up 5%... chances are you aren't breakeven yet. That's why they often say 7 years is the minimum time you should own a property.

3. Median house price is just an indicator... it will have some influence on the next time you transact your property... but it's not a guarantee. i.e. don't treat it like the last price of a share. Every property and each transaction is essentially unique... and the last +/- 5-10% in price easily comes down to specific circumstances like skill of the agent/auctioneer, desperation of the buyer/seller, amount of marketing, weather of the day, presentation of your neighbour's yard etc.

4. Property development is not simple or easy. There are so many rules and regulations... you need to ask yourself what "value add" do you bring. It's no different to going into any other new business...you don't even know what you don't know. It doesn't mean one cannot learn or acquire such knowledge... it just means you should be in a strong financial position when you do so (or have a really experienced trustworthy partner).

4. Non-financial considerations are obviously important as well... but I won't list them here. I would just say this... as a husband and Father myself, there are aspects of owning your home that trump most financial metrics. But no... it doesn't trump affordability.

5. IMO... if you are not in property already today then there is probably less urgency to be in property in the short term. The heat has clearly come off and chances are high for a period of stability or consolidation (if not actual falls). During a period of little or no property price growth, the renter's hand actually grow stronger - assuming they continue to spend / save / invest in the same manner as before.

Best of luck.

 

[sinner]

Agree with this - in the ends its an opportunity cost.

As I said, interested in your brain's view of my quick lunchtime example

You seem hell bent on receiving a formula. I do have this in my notes:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

 

[skc]

renting is dead money.

I hear this crap spouted all the time but what does it actually mean? It means nothing, it's nonsense.

+100. I hate that saying. Interest payment is just as dead as rent payment.

The numbers for renting is simple... the renter is paying <5% to enjoy something that the owner is paying >5% to own. And in return, the owner gets a chance at leveraged return in capital. It's not a foregone conclusion who would be financially better off.

 

[skyQuake]

Quick! Time to jump on to the bandwagon!

Heard a good saying:

Unless you buy a house outright, you're either renting the place or renting the money for it

 

[Value Collector]

Unless you buy a house outright, you're either renting the place or renting the money for it

Thats very true, but the cost of renting the money goes down over the years, your property rent should rise atleast with inflation, the principle of the loan is fixed, or should decrease as you pay it down. So apart from flucuations in interest, the cost of renting the money reduces compared to your inflation adjusted wages.

In 20 years your rental payments on a property might have quadrupled, but the renter of the money might not even have a loan anymore, and is left with just property costs which probably make up 20% of the rental cost.

 

[CanOz]

Quick! Time to jump on to the bandwagon!

Heard a good saying:

Unless you buy a house outright, you're either renting the place or renting the money for it

Buy them with the banks money and then plop down the funds in an offset account. We paid $1.75 in interest last year...

 

[sptrawler]

I thought I just gave it!

Either the house is a PPR, in which case no such relative valuation equation applies and what should matter to you is your ability to pay off the nut over the long term and benefits/detractions to your life (for me, as stated, mobility and not having leverage on a perceived overvalued asset take priority). Don't treat it like an investment, it isn't one.
.

Agree with you, your ppr only keeps the rain of your head, it isn't an investment.

The investments, other than your ppr, put the food on your table.

Also, the one thing you can't buy is time, often people get to an age where there isn't time to buy the ppr, many of my mates have reached the age and it isn't funny.

Not only are your investments going up, usually the cost of a suitable ppr, is also.

 

[sinner]

Thats very true, but the cost of renting the money goes down over the years, your property rent should rise atleast with inflation, the principle of the loan is fixed, or should decrease as you pay it down. So apart from flucuations in interest, the cost of renting the money reduces compared to your inflation adjusted wages.

That's a pretty strange perspective...you mean "apart from the fluctuations in the cost that closely tracks inflation specifically to compensate lenders for the costs of inflation"?...

In 20 years your rental payments on a property might have quadrupled, but the renter of the money might not even have a loan anymore, and is left with just property costs which probably make up 20% of the rental cost.

Rents track wages not some magical number that goes up forever.

In 20 years the money renter might not have a loan anymore but the $ cost spent so far by the property renter will be significantly lower. Especially if rents quadruple.

Because, you know, the economy is all connected, what with wages and growth and inflation and interest rates...they're actually not the isolated factors you seem to be portraying them as.

I mean, is there really a ceteris paribus situation where rents quadruple? Come on...

 

[kid hustlr]

Slightly confused by the discussion now and don't want this thread to turn into a 'what's likely to happen with prices' thread.

I hear everyone's view on needing a roof and the wife wanting a family home etc etc but I'm sorry your PPOR is still an investment and a big one at that.

You can't simply say 'oh its your PPOR' don't count it.

If that PPOR is likely to gain at 10% a year vs nothing then that is a factor.

if putting your money in the PPOR means you get 0% return whilst you could put it in the stock market and get 20% thats a factor.

Ultimately, given the linkage of the economy it's likely the disparity isn't that large but you understand the point im making.


take the business man who can invest in his business and make 100% a year returns. he would be silly to put money into the mortgage rather than reinvest in the business.

As such surely you asses your situation, assess your views of likely returns going forward and make a decision. It's clearly not black or white but its definitely an investment decision

 

[satanoperca]

Was thinking about this one today. In regards to attempting to retire as early as possible is there a general consensus as to whether one should rent and invest or buy there PPR and pay of the debt first before investing?

Obviously there's a huge amount factors which come into play but I was wondering if anyone had any literature or thoughts on the topic.

Given my current life situation and the absurdly low yields (or put another way, cheap rent) offered up by Sydney property, I wonder if it skews the equation in favour of becoming a permanent renter and investing the difference?

You are looking for numbers without supply any to work from to start with.

Ie what is current net income?
Is the household dual income?
Do you have dependants or plan to have in the future?
How safe is your job in the current market place?
How much deposit have you saved?
Do you have any plans in the future to build your own business?

And most importantly if you were to buy a PPOR, what LVR would you be looking at? If it is below 80% you should investigate buying a home. If it is greater than 80% then keep saving.

Do you currently trade/invest in shares and what has your returns been like over the last 5 years.

Are you risk adverse? Ie are you willing to bet everything on the house or not.

I personally believe that paying off your PPOR as fast as you can is the best investment you can have. Once paid off it is up to you whether your risk/use some of the equity for other investments.

There is no magic formula.

 

[sinner]

You can't simply say 'oh its your PPOR' don't count it.

Um...you asked what "I simply say", so I think I can, and it actually represents my best intentions and opinions. Are you the saying police now?

take the business man who can invest in his business and make 100% a year returns. he would be silly to put money into the mortgage rather than reinvest in the business.

He might be silly, or he might have different priorities than making 100% per annum on every single dollar. Warren Buffet comes to mind, I think he paid $35,000 for his house in the 50s, with a salary of about $12,000 and ~$175,000 in net worth.

 

[kid hustlr]

You are looking for numbers without supply any to work from to start with.

Ie what is current net income?
Is the household dual income?
Do you have dependants or plan to have in the future?
How safe is your job in the current market place?
How much deposit have you saved?
Do you have any plans in the future to build your own business?

And most importantly if you were to buy a PPOR, what LVR would you be looking at? If it is below 80% you should investigate buying a home. If it is greater than 80% then keep saving.

Do you currently trade/invest in shares and what has your returns been like over the last 5 years.

Are you risk adverse? Ie are you willing to bet everything on the house or not.

I personally believe that paying off your PPOR as fast as you can is the best investment you can have. Once paid off it is up to you whether your risk/use some of the equity for other investments.

There is no magic formula.

All good points. Especially the risk adverse one.

Not sure the future income influences my decision NOW though. I'm trying to make a decision for the future witht he cash I have now.

Um...you asked what "I simply say", so I think I can, and it actually represents my best intentions and opinions. Are you the saying police now?



He might be silly, or he might have different priorities than making 100% per annum on every single dollar. Warren Buffet comes to mind, I think he paid $35,000 for his house in the 50s, with a salary of about $12,000 and ~$175,000 in net worth.

Sinner I would never doubt your thoughts for a second.

Buffet is just brilliant.

 

[Value Collector]

That's a pretty strange perspective...you mean "apart from the fluctuations in the cost that closely tracks inflation specifically to compensate lenders for the costs of inflation"?...
Rents track wages not some magical number that goes up forever.

...

What I meant was that interest rate fluctuates up and down over the years, but your interest charge is going to be based on a fixed principle eg $350,000. the principle wont increase with inflation. if you bought your home in $1995 with a $150,000 loan and never paid off any principle, your wages (and rents) would have increased due to inflation, but inflation would not increase the size of the loan, so a 1995 renter, is now paying 3 or 4 times the rent he was then, where as a home owner is paying roughly the same rent on the money (if he hasn't paid down the loan)

and the gap between renting money and renting property increases more and more the longer the time frame.

I mean, is there really a ceteris paribus situation where rents quadruple? Come on

In the markets I am familiar with rents have quadrupled since 1995,

The property owner also with see the positive effect of the capital value of the home increasing with inflation, even if capital growth is only inline with inflation.

 

[Value Collector]

I'm sorry your PPOR is still an investment and a big one at that.

You can't simply say 'oh its your PPOR' don't count it.

I agree, it is an investment, it is a capital outlay that will return value to you over time that has a real cash value.

while it doesn't produce income directly, it stops you having to pay rent which is kind off the same thing.

If you put $500K into bonds paying 4% and then use that interest to pay your rent, most people would agree you have a $500K bond investment, So if you instead put that $500K into a property and it eliminates your rental expense then that in my opinion is also an investment.

I think it also becomes a better one, because the principle value of the bonds would not increase with inflation, the principle value of your house probably will, the interest income the bonds won't increase over time but your rent will, so the expense that your own home is offsetting is growing.

 

[sptrawler]

Slightly confused by the discussion now and don't want this thread to turn into a 'what's likely to happen with prices' thread.

I hear everyone's view on needing a roof and the wife wanting a family home etc etc but I'm sorry your PPOR is still an investment and a big one at that.

You can't simply say 'oh its your PPOR' don't count it.

If that PPOR is likely to gain at 10% a year vs nothing then that is a factor.

if putting your money in the PPOR means you get 0% return whilst you could put it in the stock market and get 20% thats a factor.

Ultimately, given the linkage of the economy it's likely the disparity isn't that large but you understand the point im making.


take the business man who can invest in his business and make 100% a year returns. he would be silly to put money into the mortgage rather than reinvest in the business.

As such surely you asses your situation, assess your views of likely returns going forward and make a decision. It's clearly not black or white but its definitely an investment decision

I see the ppr as a necessary cost, as opposed to an investment, but that is only my opinion.
From my perspective, an investment is something that requires selling, to realise the investment. Therefore it has to be something that isn't clouded by personal emotion, you may want to flip ppr's, which can be a very good plan.
As long as the other partner is happy to do that, once someone becomes attached to the ppr and doesn't want to sell it. It no longer is an investment, it becomes a roof over your head.

 

[Value Collector]

I see the ppr as a necessary cost, as opposed to an investment, but that is only my opinion.
From my perspective, an investment is something that requires selling, to realise the investment. Therefore it has to be something that isn't clouded by personal emotion, you may want to flip ppr's, which can be a very good plan.
As long as the other partner is happy to do that, once someone becomes attached to the ppr and doesn't want to sell it. It no longer is an investment, it becomes a roof over your head.

A share that pays dividends that you never intend to sell is still an investment, a property pays a weekly dividend In The amount of rent it offsets that you would normally have to fund from another income source.

There are share holdings that have been held in families for generations, and probably never be considered for sale, this doesn't stop them being investments, contributing value into the family. Whether you intend to sell something or not isn't what qualifies something as an investment.