For many, home ownership is the goal, and the benefits of renting are glossed over in the pursuit of ownership. However, this shouldn’t be the case. In a world where we celebrate leasing rather than buying services (E.g Netflix, Spotify, etc.), why don’t we think the same of the world’s oldest subscription service - renting.
This article will go through some reasons why renting might be better than home-ownership and how to still invest in the property market without necessarily having to put up the amount that home-ownership would require.
1. No maintenance costs
If you’re a responsible tenant and don’t break anything due to negligence, then you’re likely to experience no maintenance costs or bond claim. Instead, any maintenance and repair costs are the responsibility of the landlord.
This means that if an appliance stops working or the roof starts to leak, as a renter, you don’t have the responsibility to have these things fixed. Depending on the repair/replacement, these repairs can add up. Most house owners can expect a repairs budget of roughly $3000/year.
2. Renters can afford nicer areas
For many, renting can be accessible in nicer neighbourhoods, where owning may be outright impossible. Especially for those that favour inner city living for the restaurants, bars and proximity to places of work, renting may be the only real way of living so close to the CBD.
Additionally, many rentals have access to considerable amenities, including pools and fitness centers, access to which can be difficult for homeowners.
In recent years, there’s been a rise in “rentvestors” - those that purchase a property in a suburb where house prices are cheaper and rent it out to cover mortgage repayments whilst also renting in a nicer area of town. This allows rentvestors to rent in a nicer part of town whilst still investing in the real estate market elsewhere where it’s more affordable.
3. No sale/purchase costs
There’s a lot more to the price of a property than the mortgage price or the outright price. Once factoring in taxes and real estate agent fees, it costs roughly 4% of the property’s value to sell and roughly 6% to buy.
These are substantial costs that require significant increase in property value of the duration of owning the property to offset the property’s purchase and sale expenses.
4. Much smaller down-payment
For the vast majority of prospective home-owners, a mortgage will be needed to finance the property’s purchase. Most mortgage lenders will require a minimum downpayment to show that you are financially responsible.
This down payment will usually equal roughly 10% of the property’s value. This means that a property with Sydney’s median house value of $1.1 million will require a down payment of roughly $110,000.
Rental also have a downpayment; in the form of a bond. For most Australian states and territories, the bond cannot exceed the value of four (4) times the property’s weekly rent. This means that a property with a rent of $540/week (Sydney’s median rent), requires a bond of $2180.
That’s a downpayment of $2180 (Max) vs $110,000 (or more).
5. Not as affected by market volatility
Although Australia has experienced a significant property boom over the past decade, market volatility is something that affects all homeowners and can be a significant cause of stress.
In fact, as of October, 2018, 386,000 Australian home owners owed the bank more than the value of their home, after house prices have fallen drastically over the past year.
Due to the fact that a renter’s investment into the housing market is nowhere near the value of an owner, they are less affected by a downturn in the market and the stress that a downturn brings to property owners.
6. Flexibility
More than ever, people are on the move. So, if you’re expecting to be moving internationally for work or can see yourself taking a year off to explore the world anytime soon, you might enjoy the flexibility of renting over home ownership.
Additionally, you can change the term if your lease (e.g. month-to-month or a 24 month lease) to best suit your needs. If you’re thinking of settling down for a couple of years, then a 24 month lease will allow for more stability and usually cheaper rent due to the longer duration. Alternatively, if you’re constantly on the move for work or travel, month-to-month leases might suit you better.
Furthermore, renters that come across a moment of financial hardship are simply able to find a cheaper place to rent, whereas home-owners must consistently pay back their mortgage.
7. Free up your savings
One of the good things about home-ownership is that it forces you to save, through paying back the mortgage and gaining further equity in the property, which can be viewed as an investment.
However, owning a home isn’t the only way to force savings, nor is it the only way to invest in the property market.
Investing in Real Estate Investment Trusts (REITs) is a viable way to invest in the property market. A REIT is a trust that holds a portfolio of properties that are picked based on an expectation that they will increase in value, which in turn increases the value of your stake in the fund. REITs require a much smaller minimum amount of investment compared to the price of independently purchasing an investment property and offer similar percentage returns.
See more: REITS
Summary
So, maybe renting gets a tough rap after all. It works better for people who prefer a flexible lifestyle, and don’t want the financial commitment of buying a house. Also, with investment opportunities in the property market becoming more accessible than ever, renters can also invest in the property market without having to put forward the money for a house.
Happy renting,
Team Snug