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Klauster Properties Ltd - Tenant’s Blog |
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Rent vs Buy In New Zealand |
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Cost of home ownership, Dollar comparison of cash flow shows that renting is cheaper than home ownership. Do you throw money away? A given example answers why would you rent or own? |
Dollar ComparisonRenting is cheaper, do you throw money away?
Over the years you could follow debates about renting vs buying. In medias real estate is still one of the biggest engines driving New Zealand’s economy. But at the end where to live is a very personal decision. Possibly you know many reasons why renting is very attractive. It is a lifestyle decision that allows you to pass on the responsibilities of home ownership to someone else including all major property related expenses. There is no difference between renters or homeowners at this point for all payments on rent, repairs, rates, insurance and interests - not a single cent returns.
Take this and think for a while, does it really matter financially if you rent or own the home you live in? The day-to-day expenses are paid by the occupant anyway. Call it rent or homeowner’s running costs. If the house related costs go up, rents go up, too. The economical factor of supply and demand, that also impacts the market rent, I discuss under property investments and is not part of the example below.
A real Dollar Example; Today a renter pays for an three-bedroom house 370 Dollars rent per week, total 19,240 Dollars annually. That’s all.
If you purchase the same property for 330,000 Dollars, by 60K deposit, you would take on a mortgage of 270,000 Dollars. By an interest rate of 6.1% that loan would cost you annually 16470 Dollars interest to keep your bank happy. But for planning reasons you should take at least the average interests of 7.5%. Calculated by 7.5% you would already pay more interests to the bank as your rent would be. Is that a good deal? And by the way owners paid in year 2007 9.75% interests. And interest rates on home loans will spike again, here you can be sure!
In excess for owning that house you have to consider around 5000 Dollars annually running costs for rates, insurance and maintenance. And of course for paying off your mortgage the principal payments will be 200-300pw depends on the duration of your loan. Your total weekly payments would be between 670 and 750 Dollars (interests + principal + running costs).
If you keep renting and invest your 60K deposit by 4.5% you would earn 2700 Dollars interest. That would reduce your weekly payment by other 53 Dollars. For simplicity your tax situation is not included!
How to interpret that cash-flow example?
1) The rent will increase over time but so do house related expenses like rates, insurance, maintenance. Cash-flow wise these figures tell you renting is cheaper than owning the place.
2) Money you pay as rent/lease doesn’t cumulate equity, such as real estate — but homeowner’s interest payments neither.
3) If you save and invest that money needed to maintain and repair a property and to pay off the loan — you will be much better off than holding a property.
4) Besides paying off the mortgage and in these days 3k for maintaining a three-bedroom house that will cumulate in 20 years more than 60,000 Dollars. Let me guess additional 100k for new guttering, roofing, structure repair like re-piling and few improvements on insulation, heating, hot water systems, new kitchen, bathroom etc. we talk about 160K+. That is approximately in Dollars what the property increases in value, commonly called “capital gain”. So—capital gain is not a gift—it’s a result of treating a property well by keeping it on standard!
Renting is cheaper — Why is ownership still for many the preferred solution?
1) The weekly payments for homeowners go down to a minimum when paying off the mortgage and the cumulated equity provides financial security.
2) In opposite renter’s costs are increasing constantly driven by inflation. When going in retirement possibly the renter can’t afford to stay on. The truth is if the renter would have saved “the cash-flow advantage” the story would be a different one — but statistically renters don’t do that.
3) A homeowner must complete his “enforced savings plan” and as result he is better off.
So, take a fresh look at your situation. Make an educated decision — it’s your life Klauster
NB Don’t be confused — Homeownership as investor is a different story - mixed often up in the media. I will illustrate an example, too – watch this space! |
