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To rent or buy in Aus - article


Bronwyn&Co

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I have been thinking i want to do a side by side comparison with real numbers for a while now, need to get off my butt and do it.

There is definitely no direct benefit in buying over renting when you take into consideration the below, there is however a benefit of you being able to modify the place as you want (At the additional cost of course), the forced savings as mentioned above, and some people just want to live in their own home

If you are taking the different between renting and buying and saving it, it could be more flexible to just put it in the bank

The following are extras you don't need to worry about as a renter

Initial legal / contract / bank costs,

Purchase Taxes & Duties

Total property cost after adding interest and bank fees for 20-30 years

Maintenance

House Insurance

Ongoing Rates & Taxes

Sales Agent fees (You will need to pay when you sell)

Additional sales costs (Clean, Fix, Display)

You need to consider the sales costs as you will one day move and the investment is only worth what you can get for it as someone also mentioned earlier

I will do the sums tonight and post what i find :D

Edited by Nev
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Nev there was a guy on here called Springjock some years ago. He was a finance host but he seems to have disappeared. Anyway, he put up an excellent comparison that indicated renting is better, but the key is that you have to save the difference between rent and mortgage (which not many people do). I can't seach for him on my phone, but the link is on here somewhere.

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cool will have a dig

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Nev there was a guy on here called Springjock some years ago. He was a finance host but he seems to have disappeared. Anyway, he put up an excellent comparison that indicated renting is better, but the key is that you have to save the difference between rent and mortgage (which not many people do). I can't seach for him on my phone, but the link is on here somewhere.

No, that was Spingbok, (Charl Marais, lives in Sydney). Not to be confused with Springjock, who had problems with handling the amount of testosterone in his system, if I remember correctly. :boxing:

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No, that was Spingbok, (Charl Marais, lives in Sydney). Not to be confused with Springjock, who had problems with handling the amount of testosterone in his system, if I remember correctly. :boxing:

Haaaaahahahahahah. Best post I've read all week. As I read Bronwyn's post, I thought "Springjock, really, was he a host? Gee, they let anyone in these days"

Back on topic.

I guess the big question is - at what point of capital growth (or rental growth for that matter) does buying become cheaper than renting. There must be a tipping point that is hard to track over your 25 year term. It's easy to look back and say "oh yes, I should have rented/bought over the last x years with the way things went" but anything in the future is a big lucky packet for all - even the experts.

I simply cannot imagine moving every year, six months, even two years because you're unhappy with your rental or your landlord sells under you. I was happy to do that back when I lived out of a backpack, but lately... Eish!

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Yep hansa, it is not just about the $$$, there is a lot to be said for the security of owning your own home, there is a lot of nonsense about the finances around buying a house from a savings perspective however, i have known for a wile it wasn't the best investment option but i wanted to know the amounts, so....

Firstly i need a better hobby....

I couldn't find the post from the other chap so i did my own research and put it all together

This is based on a first time buyer from a tax perspective, home to live in & not newly built

A 650k 3 bedroom House

The sales price is based on the value of the house increasing by the historical average and not considering that it will be an old house in 25 years and loose value from that.

There are all the references at the bottom and my calculations, feel free to step in but im pretty sure i have been more than fair

I could find the average 20 year home loan rate of 8.44% where current is 5%, i used that to calculate an approximate 20 year savings rate of 6.72% where the current is 4%

Bottom line:

If you buy, after 25 years you will have $ 1 326 000

If you rent and save the different after 25 years you will have $ 2 592 569

(And could buy almost 2 of the houses cash)

Median Home price Melbourne $650,000

Deposit $65,000

Mortgage $585,000

Initial Costs

House inspection $450

Stamp & Duty (Home & Mortgage) $35,547

Conveyancing $1,000

Bank Fees $1,000

Lenders Mortgage Insurance $13,046

Total starting Costs to finance $622,997

Total Paid to bank (@4991 pm) $1,497,300

Value after 25 years @ 3% Growth pa $1,360,955

Less Agent fees 2.5% $34,024

In the bank $1,326,931

Annual costs

Building insurance $932

Rates $3,250

Av Annual maintenance $6,500

Total $10,682

Increased by 2.5% inflation (After 25y) $19,804

Average total monthly value $15,243

Total Monthly cost $1,270.26

Monthly repayment (Bought) $4,991

Monthly Costs $1,270

Total Monthly $6,261

Approximate rental $1,900

Averaged at 3% inflation after 25 years $2,939

Difference Saved $3,322

After 25 years at compounded interest 4% $2,592,569

References:


ok, that table came out as a mess, here is my calculations in excel

https://dl.dropboxusercontent.com/u/45882280/HomeCost.xlsx

Edited by Nev
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I simply cannot imagine moving every year, six months, even two years because you're unhappy with your rental or your landlord sells under you. I was happy to do that back when I lived out of a backpack, but lately... Eish!

Yeah. Since 2010...

  • I moved from Roodepoort to Sandton
  • I moved within Sandton two times - once to get away from horrible neighbours who were drivers for the ANC blue light brigade and who would party with impunity from Thursday to Sunday like savages (the guards of the Luxury Upmarket Morningside Complex were too scared to do anything), and again because the owner of the unit I lived in was held up in an armed robbery and wanted to move into the security estate herself.
  • Then I moved from Sandton to Roodepoort.
  • Then from Roodepoort to Perth. In Perth I moved two more times - from Churchlands to Joondalup, then to East Perth.
  • Then for good measure I just packed up and moved to Melbourne. I've been here less than a month and I've lived in the hotel, with some friends and soon I'll be moving into a short term furnished place while I wait for the place I bought to settle. Then I move to the new place.

I'm GATVOL of moving. I never want to move again. I'm so glad I've bought a place and I hope to live in it without needing to move for at least 10 years.

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This debate is ongoing for a long time. Hopefully the attached doc will give more clarity.

Buying a property is an emotional decision and many may struggle with the idea to 'own' 4 rentals before deciding investing in their own property. It is a mind set. A few rules to consider:

  • The advantage of investment properties (IPs) are leveraging, capital growth, rental yield and available tax rebates.
  • Never sell a property and never pay an IP off - the value of a property doubles every 7-10 years
  • Buy an IP new for biggest depreciation
  • Always buy a property at a discount & buy directly from the developer
  • Use minimum of your own capital - thus borrow max
  • Buy and wait not wait and buy
  • Never over capitalise for the area and diversify your portfolio across Aus due to the different economic cycles
  • As part of your due diligence buy investment reports like RP Data & Residex reports
  • Know where are your growth areas that over exponential growth over the last 3,5 and 10 years
  • Do not try to time the market precisely - property is fault tolerant.
  • NEVER follow investment advice in the newspapers
  • Understand the financial calculations behind investment decision making

Two great books with a complete different perspective to consider:

a. More wealth from residential Property - Jan Somers

b. Property Prosper Retire - Kevin Young

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@ Robbie_P

Thank you for the reply and those numbers, the figures now make sense. I Did'nt think I can buy a house for that amount hence it did not make sense.

@Nev

Well done on those calcs and you figs do make sense

What I take from this is the following:

1.Rent a modest house and invest the savings religiously (What your saving as apposed to buying the same house also if possible add to the savings what you think your maintenance cost would have been if you can).

2. Do Buy a property with just enough of a deposit, so the rental you achieve covers the mortgage or nearly if not it will catch up with the mortgage in a cpl yrs, effectively the tenant pays off the house and you borrow as much as the potential rental will allow you to cover. If you can manage to pay off this house quicker you own an income generating asset and you can repeat the process, or add that rental to your current savings plan.

But moral of the story, invest your money and use tenants payments to pay for your assets.

Any insight into this or am I missing something?

Trev

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Nev, good one on the calculations. It's funny view but it is very expensive to buy a property to live in when you morgage it for the full term. If you rent for 10 years and save hard you going to be pounds up when you buy because you will basically own the place, and if you get a good return on your investments you will be styling.

The other thing is it becoming harder to just work in one place for some industries, globalization sees people having to move all over the world now to work. So renting is in some ways advantages, it allows one to move quickly, if you own then you might not be able to move and in the end if you lose your job and can't pay you lose your home as well as you may also lose the entire investment you have made

There a bloke I worked with who invested about 2 million rands in the stock market which was there for about 2 years, just cashed in and the investment at 9 million. So his money worked magic for him.

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Yep hansa, it is not just about the $$$, there is a lot to be said for the security of owning your own home, there is a lot of nonsense about the finances around buying a house from a savings perspective however, i have known for a wile it wasn't the best investment option but i wanted to know the amounts, so....

Firstly i need a better hobby....

I couldn't find the post from the other chap so i did my own research and put it all together

This is based on a first time buyer from a tax perspective, home to live in & not newly built

A 650k 3 bedroom House

The sales price is based on the value of the house increasing by the historical average and not considering that it will be an old house in 25 years and loose value from that.

There are all the references at the bottom and my calculations, feel free to step in but im pretty sure i have been more than fair

I could find the average 20 year home loan rate of 8.44% where current is 5%, i used that to calculate an approximate 20 year savings rate of 6.72% where the current is 4%

Bottom line:

If you buy, after 25 years you will have $ 1 326 000

If you rent and save the different after 25 years you will have $ 2 592 569

(And could buy almost 2 of the houses cash)

Median Home price Melbourne $650,000

Deposit $65,000

Mortgage $585,000

Initial Costs

House inspection $450

Stamp & Duty (Home & Mortgage) $35,547

Conveyancing $1,000

Bank Fees $1,000

Lenders Mortgage Insurance $13,046

Total starting Costs to finance $622,997

Total Paid to bank (@4991 pm) $1,497,300

Value after 25 years @ 3% Growth pa $1,360,955

Less Agent fees 2.5% $34,024

In the bank $1,326,931

Annual costs

Building insurance $932

Rates $3,250

Av Annual maintenance $6,500

Total $10,682

Increased by 2.5% inflation (After 25y) $19,804

Average total monthly value $15,243

Total Monthly cost $1,270.26

Monthly repayment (Bought) $4,991

Monthly Costs $1,270

Total Monthly $6,261

Approximate rental $1,900

Averaged at 3% inflation after 25 years $2,939

Difference Saved $3,322

After 25 years at compounded interest 4% $2,592,569

References:

ok, that table came out as a mess, here is my calculations in excel

https://dl.dropboxusercontent.com/u/45882280/HomeCost.xlsx

I didn't look at the figures, or try to critique them, but would be interested to understand how they would pan out if after the mortgage had fallen by 20% those funds were used to purchase another property (say the one next door) and rent it out. And then repeat the process.

It should end up with say 6 properties, all of them with pretty high mortgages on them, but each having the rental income and capital gains.

This is the one thing that hasn't been mentioned in these arguments, and that is the ability with a property which has borrowing capacity to act as security for other investments, something that can never be done with renting.

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Nev, good one on the calculations. It's funny view but it is very expensive to buy a property to live in when you morgage it for the full term. If you rent for 10 years and save hard you going to be pounds up when you buy because you will basically own the place, and if you get a good return on your investments you will be styling.

The other thing is it becoming harder to just work in one place for some industries, globalization sees people having to move all over the world now to work. So renting is in some ways advantages, it allows one to move quickly, if you own then you might not be able to move and in the end if you lose your job and can't pay you lose your home as well as you may also lose the entire investment you have made

There a bloke I worked with who invested about 2 million rands in the stock market which was there for about 2 years, just cashed in and the investment at 9 million. So his money worked magic for him.

Id Love to know what he invested in..... :jester:

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the value of a property doubles every 7-10 years

....

[*]Always buy a property at a discount & buy directly from the developer

Some of it makes sense, but I'm sorry - these two lines above make me not want to listen to any of the rest of the advice.

The value of a property does not double every 7-10 years. This is the same line that is thrown about by every agent or developer in the business to get naive buyers to sign. Sure, if that 7 to 10 years is between 2003 and 2014 you might be right, but look further and it's not as cut and dry as that. I'm pretty sure the value of most properties is not going to double in the next. 7 to 10 years.

The second one - always buy straight from the developer - again, blanket statements that do not apply to everybody. Sounds like that one came straight from a developer! What about deceased estates, divorce cases, bankruptcy cases, or just plain old doing your homework to find a bargain or a good prospect. That advice is leaving out all the gems in the market - existing houses that can be renovated or knocked down and subdivided, etc...

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The second one - always buy straight from the developer - again, blanket statements that do not apply to everybody. Sounds like that one came straight from a developer! What about deceased estates, divorce cases, bankruptcy cases, or just plain old doing your homework to find a bargain or a good prospect. That advice is leaving out all the gems in the market - existing houses that can be renovated or knocked down and subdivided, etc...

Never buy off the plan!

I don't know of a single person who bought off the plan whose property didn't lose value and take quite a while to eventually recover. The place I just bought is a perfect example (although unique, because it's in Docklands VIC, an area with an unfortunate history* in terms of value). Using hypothetical amounts, I paid $1,000 for the place now in 2014... it was completed in 2003 and was sold off the plan for almost $1,200.

*The buildings were mostly completed just as the GFC hit. People had bought off the plan and the banks wouldn't settle as they only perform the valuation when the building is completed. So there was a huge swathe of people who paid 10% deposits, a sudden need to get rid of apartments, too many apartments coming onto the market at the same time (a problem that continues), plus the GFC... so despite Docklands actually being quite a nice area, it's perceived very negatively and as very risky. I think it'll be another 10 to 15 years before values there start growing properly because there are so many apartments being built in and around Melbourne, but when they do they should see good growth. People are starting to notice Docklands though. I think it's good value down there - within 2km of the city centre, water and city views and often for a relatively cheap $500k to $600k. And the older buildings (built before 2007) are quite spacious compared to the matchboxes being built now.

Another piece of good advice from above is to get the RPdata reports. If you get these individually you can pay around $30 per report... but there's a hidden way to get these for free. Use a mortgage broker - chances are you not only get the benefit of having someone with some knowledge of the banks and how they operate who can advise you on how much you can realistically borrow, they also have subscriptions to RPdata (and some other one) so they can pull the reports for you... they are so helpful! Mostly because you can't judge the value of the place you want to put an offer in on based on Domain.com.au listings - those are almost always overinflated (or too low to try entice buyers to come look to create a buzz around the property so that some poor sap is sucked into paying too much). The reports show ACTUAL sales prices with dates so you can compare. Was extremely helpful - and don't be scared to take that report with you when you go to put your offer in. I sat with the real estate agent and showed him why I felt the sellers were asking too much for their property. Worst that can happen is they counteroffer or reject your offer... then you just walk away.

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Id Love to know what he invested in..... :jester:

@Trev Maybe Nike? ?

@ Nev thanks for that, I'm sure it's going to assist people.

My 2c - I am unlikely to buy off plan, because it's not a bargain if 200 people also think so. The market will determine the true value of the places a way down the track, when all the investors are trying to cash in or vying for tenants in the same block. It can work as a loooong term strategy if all the other factors (below) are in place.

Better to stick to the basics: near transport links, shops, with parking, nice size bedrooms, that extra bathroom.

I like a place where you can turn the laundry into another bathroom or capitalise on dead space like a double garage. Still like bricks ;) These are difficult to find/do in a newer unit.

Any lettable area is $$$ in your pocket.

Oh and by the time you've read about it in Property Investor magazine, it's way too late.

Edited to add- someone on the forum pointed out a website called 'Old Listings' - absolutely invaluable for finding out what places really sold for.

Edited by Bronwyn&Co
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According to the 20 year average house prices increase at 3%, that means a house doubles in price every 23.5 years

The sudden burst in house prices recently is actually a bad sign not good, especially as it is not being matched by salaries and rental prices

At the current rate a 650k house has a payment of $3 799

The 20 year average = $ 5 207

The 20 year worst = $ 9 345

The problem with having lots of properties all on finance is if the interest rate goes from it current lowest value in 20 years to the worst, or even back to the average, the payments will make a lot of people loose their homes, just because the interest rate goes up you cannot suddenly triple someone's rent, you will need to come up with the difference.

If the houses are mostly paid off you will be ok as you can absorb the difference, if not you in trouble, interest rate increases also lower house prices, as demand drops and urgent sellers increase, this is pretty much what happened in the USA, just on a crazy scale

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Just as a side note - for those interested in buying a home or investing, there is a Home Buyer and Property Investor Show on at Sydney Showground, Olympic Park this weekend starting tomorrow.

Check out the website and register to buy your tickets online if you'd be interested to learn more about buying your first home or an investment property:

http://www.homebuyershow.com.au/

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The idea was not to give a comprehensive explanation about the do's and dont's of IP. Surely there are many different ways to go about property investments thus the 2 books I recommended. Also your strategy will be different if you seek growth versus income. Regarding capital growth, in some areas it even tripled - compounded over 10 years - the idea is to find those gems - this may even be property in distress.

Then about doing self development - if you dont know the construction industry then simply just dont do it alone, specially if you are staying in another state.

  • Another point is that you always buy below the median house price in the correct location.
  • Never use free reports - be prepared to pay for valuable information
  • Beware of paralysis by analysis - just buy the investment calculators and dont try to be exact - a waste of effort
  • Always use a professional property valuer and property inspector - all tax deductable

These are examples done last year - per postal code area around the median house price and average for the selected area. I then use different weighted selection criteria to filter down the growth areas. Always use this in comparison with other reports to verify your results. Understand how to interpret the reports eg doesnt help you purchase the top 200 yielding suburb report but all the properties are way above the median house price or up in the remote mining areas (although there is a place for them in a large portfolio).

Excellent forum: http://somersoft.com/forums/ read, read, read They also offer an Property Investment Analysis tool but perhaps to comprehensive. Keep it simple.

Online research off-the-plan properties http://www.realestateinvestar.com.au/ME2/Default.asp Note I havent used it to make a buying decision yet but my first observations were positive. I was also able to get a free account.

Get property investment calculators here: http://www.investmentpropertycalculator.com.au/ some are free BUT be prepared to always pay for quality

Hope it helps!

Edited by ottg
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We are in a bit of a quandry. We have an investment property in Brisbane as well as our own house. This was never our aim, it happened because our house flooded and we didn't want to live there any more. We tried to sell, but started getting offers at 20% below purchase price. So decided to tenant the place and wait. The tenants cover the mortgage.

We bought another house to live in, to take advantage of the depressed Brisbane market.

Now if we try and sell house number 1 (3 years later) we might get our purchase price back (its a big maybe).

If we keep it ticking over all good, but we're paying interest only so the loan amt stays constant. There is still depreciation on the ppty so I got a small tax refund this year.

If we try and pay it off over say the next 10 years it will be a nice income but we lose the depreciation and tax advantage. But the income will be almost enough to exist on...

What do we do, sell or start paying it off??

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Hard question and the answer depends on what the property market does over the next 5-10 years, and there are just way too many differing options.

Personally i would say do the maths, if the interest rate goes back to the historical average and it should which is why it is the average, can you still afford the payment on both of your houses?

If the answer is no you are taking a big chance, if yes then you can afford to decide what you want to do.

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If you dont get the full tax benefits & no equity in the property then why would you want to pay it off?

Difficult to comment - what is the stats on the suburb? What does the financials say?

Can you do a sub-division? Can you increase the value without over capitalisation?

While I said never sell there are always exceptions......Brisbane is at the turning point but the growth may be only 2-3% and you may miss other opportunities.

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@Nev 8.44%? We can afford it but it won't be pretty. We're getting a good rental, about 6%.

Otto I'd normally agree but the temptation of having the place paid off so we can (almost) live on the income is attractive.

The block is only 405sqm, walking distance to train, 9kms from the city. It's in a great school catchment too.It's about 12 years old.

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