RENT OR BUY?
"Why would you rent? You are throwing away money with rent!"
"Buying a house to live in is an investment."
If you ever talk to someone that has been house shopping, have you ever noticed how they try to justify their spending on a house with the thought of rent being unwise. I know this because I was this person many years ago.
When I was in this situation I can honestly say that I had house fever🔥
This meant I was shopping/buying with only my emotions and not logically. I think we all can relate to this about a purchase. Maybe it's that new TV or iPhone that just came out that you want it so bad, you will do anything to justify that consumption. You will do research, seek other peoples opinion and spend a ton of time on doing so, it becomes your most overriding thought. Buying a house is no different, you can get sucked into doing research, scrolling for hours, days, weeks, months and maybe even years!
After all, buying real estate is most likely going to be the biggest purchase of your life! You want to make sure you get it right.
Trust me, I have been there, done that and "gotten the t-shirt"!
Back in 2005 when I was 19 years old I wanted to stand out and do what my peers were not doing and in my mind this was to buy a house! I went on the journey of searching for homes and remember in the US this was just before the housing crash, which meant I was trying to buy a house in a housing boom! Not a smart idea and I am sure someone tried to tell me that, but I wasn't listening. I had the attitude of "you can't tell me what to do, it's my money!"
I was going to do what I wanted and what I wanted was to buy a house (only later to find out that I really couldn't afford it and I wasn't in the position to buy).
Let me tell you right now, I didn't have a clue what I was doing at 19 years old and most teenagers don't when it comes to money.
I couldn't find a house in my price range in the area. I thought they were too old and needed too much work. I ended up looking at homes several miles away and bought a home that was considered a "spec" home which meant it was a brand new single family home that was completed with all the bells and whistles by the builder.
I settled and moved in when I was 20 years old in 2006. In case you didn't know this was nearing the high of the housing market at that time.
Long story short I finally sold that house 11 years later in 2017 for the same price I paid for it! I know, I know this was rare. This was because I paid too much and I bought in the wrong neighborhood.
"This will NEVER happen to me. Only in America."
I can hear you now AND let me tell you, it happens all the time and all around the world! You just don't hear about it because you only see the paid ads on Facebook about how to go from 0 to 15 properties in 4 years!
What I learned through this process was two things: I didn't know what I was doing AND I wasn't in the position to buy.
I teach my clients not to make the same mistakes that I made in the past!
I teach ALWAYS understand what you are investing in.
On the subject of a home purchase, I teach them to be 100% debt free and have an emergency fund of 3-6 months of expenses set aside for a rainy day. On top of that, I recommend a 20% deposit payment, as this eliminates the need for mortgage insurance (not to be confused with home insurance) which is nothing more than money you give to the bank in case you default! Next, I recommend having a 15 year mortgage where the payment is no more than 25% of your take home pay.
The 20 year old Mike Staunton had none of the above! And that is why I wasn't ready to buy. I was forced to learn the hard way and I do not want you to be in the same position I put myself into.
If you are like me and are not debt free, have an emergency fund, minimum 20% deposit payment, then the conversation doesn't even need to happen!
Stop looking at houses, go take a cold shower, and START making a plan to get out of debt before you go sign up to get into even more debt.
If this is you, then you NEED to be renting!
I like to refer to renting as practicing patience. It is buying patience for when you are ready to make the largest purchase of your life. The cheaper you rent, the faster you get in position to buy.
I often get push back on the 15-year mortgage and the payment being 25% of your take home pay. I understand its tempting and hard to resist "getting into the market" now. I have a reason and hear me out. The reason is because the long term goal is to build wealth for you and your family. The goal of a 15-year mortgage helps you become 100% debt free faster than a 30-year mortgage. Imagine that! No house payment on a house that you get to live in and enjoy. HELL YEAH! Most banks want you to do a 30-year mortgage because it means you will be paying them interest for 30 years. There is a reason that the banks building is bigger than yours, it's because you keep giving them YOUR money in the form of interest 🤦♀️.
Onto the 25% of your take home pay: this is easy, I want you to have a life. If you are busy paying 50% of your income to a mortgage, all you do is work just to pay that mortgage payment. I want you to be investing 15% and giving 10%. With a 25% mortgage, plus the investing and giving percentages, that is HALF of your take home pay. You haven't eaten, paid the lights/water bill, bought and maintained a car, or put clothes on your back AND, what about planing that holiday!
Now, if you are debt free with an emergency fund set aside then we can get back to the question:
RENTING VS BUYING!?!?
When you are in the position I went through above, how do you make the decision?
Lets discuss the differences:
I believe that renting is cheaper in the short term and buying is cheaper in the long term. This is location dependent and again, everyone's situation is going to vary. As a reminder, renting is buying patience, if you are renting as cheap as you can. Buying a home that you can afford and paying off in 15 years most likely will be better for you and your family over the long term.
However, you must crunch the numbers for yourself!
So why am I choosing to rent?
One reason, I don't want to feel locked in to one place for years and years. This is my emotional brain feeling a lack of freedom if I were to buy a home to live in. I would rather live my life with the freedom to just pack my stuff and go live in another home, or another suburb, another city or hell, even another country. This is me and my lifestyle choice.
Another reason is logically it doesn't make financial sense for me and where I live.
The numbers I ran were for a 2-bedroom/1-bath home we rented in 2019. My partner and I rented a house in Prahran, Victoria (a suburb in Melbourne) for $500/week or ~$2,160/month. This totaled $26,000 for the year. This house recently sold for $1,125,000 while we were living in it. Was it a hassle to move because of the sale? Not for us because we didn't love the house anyway. In my opinion it wasn't even that nice. It was drafty, cold, old, and didn't even have carpets in the living area 😲.
Side bar: For those with the investing mindset, that owner just bought a home to potentially rent out for only a 2.3% return! NOPE, you will never see me buying an "investment" with such a shit return! And that's if they paid cash. So you just lost all of your return on investment (ROI) to paying interest to the bank in the form of a mortgage. REMEMBER - an investment is something that pays you money, not something that you have to pay to have!
To continue with this example, if we went to buy this home and follow the steps above to be ready. Then we would need 20% down ($225,000) and our weekly payment on a 15-year mortgage at 5% would be $1,641. I like round numbers so lets just say $7,000/month. This is a total of ~$85,000 for the year.
To see how much your repayments would be click the link to the Mortgage Calculator here.
This number doesn't include stamp duty ($64,725 in Victoria for this home). Also with the purchase, responsibilities come in the form of property taxes, insurance, and maintenance. AND that stuff is not cheap.
For us to buy this home, I would need over $300,000 in just the first year and then $85,000 every year after that until the home was paid in full in 15 years. This would have cost me ~$1,500,000 to buy this home over 15 years. Again, not including all the other expenses that come along with home ownership.
During these 15 years if we were to rent this house or similar at $500/week at a rate of increase of 3.5% (average rent increase report) then the total spent would be ~$510,000.
That is $1,000,000 difference but you don't own a house. SO, you are $1,000,000 ahead in 15 years meaning it is cheaper to rent this house than it is to buy. This is "short term" at 15 years.
"What happens over the next 15 years and then the next 15 years?"
The next 15 years (years 16-30), the renter will have to have spent another ~$850,000 to rent this same house. STILL, ahead of the buyer at this point.
Over a total of 30 years, it is still better to rent than to buy in this example. Remember these are actual numbers from a house we rented in Melbourne.
Your area and numbers may look different, that's why I want you to do the math yourself!
Again, I haven't included any of the other costs that go along with owning a home. How much has the home owner spent on property taxes, insurance, and maintenance during these last 30 years? Tell me a hot water heater or AC unit lasts that long with no maintenance 🤣
"What about the next 15 years?"
So, the next 15 (years 31-45): rent has skyrocketed and during these 15 years rent has totaled ~$1,400,000 to rent this same house. This where it seems to be smarter to buy than to rent.......
That is only the cash differences.
If the renter were to invest that weekly difference of ~$1,000 in the first 15 years. How much would there be in that investment?
Of course this depends on the interest rate!
***I cannot possibly talk about every scenario on this subject***
To continue, if the $1,000/week was invested in good growth stock mutual funds (that I recommend) that have an average track record of a 10% annual return, then at the end of 15 years the investment balance will be over $1,700,000!!!! (Investment Calculator)
If you don't like my assumptions of 10% and I am half wrong (which I'm not) then you will still come out much further ahead to rent than to buy. In fact, if you invested the $1,000/week at only 5% return then you still come out with over $1,000,000 in just 15 years!
For these calculations and my numbers I have run above it is confirmed that I will most likely never buy a property in Australia. If I choose to buy a property later in life, then it will be purely a consumption of a want. For me and my lifestyle, it makes no financial sense for me to buy a property in the area I live.
This could change with your area or your country.
Another personal example, I bought a different property in the US that was purchased for $82,000 and needed ~$10,000 worth of work. It rented out for $1,000/month. Those numbers are completely different than the ones I ran above for Australia. I would consider and most likely buy that property because financially it makes sense.
"But you didn't mention equity?"
Equity doesn't matter here because you can't use or take out the cash out when this is your primary residence. If you sell the house, you have to buy another one and they have increased in price over the same time. It's a wash.
For those that think it is smart to buy, this may not be the case!
I know for me, renting is best 🤑
To recap: for me in 2019 and this home, I would be emotionally and logically unwise to buy this home instead of rent.
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