Own or rent home?
One of the major issues many people face is the question of living arrangement: Should I rent or should I own my home?”
So today I want to go over benefits and negatives of each option, so you can make an informed decision before you commit to either of those options.
Surprisingly, although I was preparing this information with retirees in mind, it is my son who actually reminded me, that this information is most certainly applicable to all ages.
It applies especially to people who:
- Have limited savings,
- Want to downsize to release savings to improve cash flow, income and lifestyle,
- People who do not want the responsibility of ongoing home maintenance.
So let’s compare owning a home versus renting it.
1. Tax Implications
Home ownership in Australia has a very important benefit, as your home is just about the only asset you can have with no tax implications – there is generally no CGT on the sale of your property. This is a big attraction for many, however, remember, that if you start running a business from home and start claiming tax deductions for expenses related to your home, this will change the CGT exemption to partial in most cases – you would need to discuss this with your accountant.
But assuming, that this is your home, you can do updates, upgrades, extensions (obviously subject to your Council approval) it will all be tax free on sale of your home.
The negative is that your mortgage repayments are not tax-deductible, and for this reason, I always advice to try to have the mortgage paid off asap to reduce repayments, as they are a real financial loss on your part.
Renting a home has no tax implications, therefore it is just your weekly cost you have to meet, the same way as you are spending your money on food, clothing or holiday.
So in the area of tax – home ownership is the winner.
2. Upfront and ongoing cost
If you buy a family home, the cost of such purchase is a substantial sum of money. YOU either have to borrow funds or you have to spend majority of your savings in one transaction for one asset, that does not provide any other benefit, than just roof over your head.
Ongoing costs of owning a home are also substantial, council, bills, maintenance, when you add it up, it is, I assure you, more than you expect, but very few actually even check the real cost of home ownership.
If you still have a mortgage, that is just an enormous amount of money you keep paying to your bank.
With renting, you know your weekly rent amount, easy to include in your budget, especially now, with the economy of very low cash rate and very high property prices, renting is cheaper than ever before.
Cost wise, there is no dispute, renting makes so much more sense than buying your own home.
3. Risks to Consider
Buying a home appears to be risk free, but not necessarily. Don’t forget that you “lock away” majority of your savings for a very long time into just one asset, and this one asset does not even pay you any income, it is actually costing you money along the way. So the only logical reason to own it is that it grows in value substantially enough to rewards us capital returns to cover all our pain along the way.
But we did have some major property crashes in Australia, so to keep all your savings in that one home is a major asset risk, while you still have liability for regular maintenance costs, equipment failures, or catastrophes such as storms or floods, insurance costs.
There are none of those costs when renting, therefore in a risk category, renting is a clear winner.
4. An Investment Opportunity?
One of the biggest misconceptions of homeownership is that it is an investment. It isn’t,
Owning a home that you live in is an expense, not an investment.
An investment is one that generates cash flow. As I mentioned before, making any return on your home only happens if your property grows in value and you actually sell the home. Considering ongoing costs, it would have to grow in value substantially for you to make a great profit.
Having said that, most of us are very poor savers, we cannot force themselves to put savings aside and just let it grow. But most of us, are very good in meeting our liabilities, hence repaying the mortgage and slowly becoming an owner of a bigger portion of our home over time, is a way of “forced saving” therefore for people who cannot safe, but are good in meeting their financial responsibilities, home ownership and paying off the loan could be the only way to actually own anything in life.
Renting on the other hand, allows you to easily structure your cashflow in a way where you can invest your surplus or your capital in an investment portfolio, that will grow in value as well as provide additional income, which you can spend or reinvest for even better long-term investment outcome. And your investment can be as diversified as you wish, or as your financial planner advises you to do to reduce the market risk but increase overall performance.
So you definitely have more investment opportunities, and less investment risk when renting, providing of course you don’t blow your surplus and your savings.
5. Cost of transactions and Liquidity
One thing is certain, home is anything but a liquid asset. If you need a new car, or you have a major bill, and you have no adequate savings on a side, you cannot sell a window, just to pay for the bill or to buy a new car.
But when renting and investing, this type of investment can be very liquid, allowing you access to money almost immediately.
Also cost of transaction to buy or sell with a property are substantial, and I mean thousands of $, you would need to prepare you property for sale, and make it “pretty” for the buyer. There are real estate agent commissions you have to pay for, advertising, etc.
It could also take a long time to actually receive the money, some settlements can take months.
While that’s not the case with most other types of investing, costs are low, timing is almost immediate, so again renting is a winner in this category.
6. Lifestyle
Owning a home is an emotional decision, more than financial:
- It makes you feel good that this is your home, your family memories, your little piece of paradise, your castle.
- This is the place you feel secure and happy – nobody can kick you out.
- You can do any changes to the house (within reasons and Council approval), but generally you don’t have to ask for permission.
Renting however:
- Allows you for flexibility, you can be one year in Melbourne, next year in Brisbane and not care about any consequences, however, that could also be a drawback, as if your landlord asks you to leave, you have no choice, but to find a new place, so place stability is not the strongest part of renting.
- It cost less, hence you can save more
- No mortgage repayments to meet, therefore more financial freedom
I will let you decide on the winner in lifestyle category as it is a very personal issue, each one of us wants a different lifestyle and needs different things in life.
7. Age Pension and retirement income
This one is for retirees, but both situations have their benefits and drawbacks:
Home ownership:
- Home is the only exempt asset under income test, therefore if you have very high savings and you want to be eligible for part or full pension, owning your home could be a very good strategy for Age Pension improvement.
- But, you leave less money to provide you with income, therefore your lifestyle could diminish due to home ownership. I know many retires that own a million $ homes and live on Age Pension alone. I am not going to judge this, each one of us is different and wants different things, but being asset rich and income poor is not an easy life.
- If you have limited funds, and you want to own home, you may have to live in the area where you can afford to buy, rather than in the area you actually would like to live.
Renting on the other hand:
- More flexible and more affordable, especially in today’s market – many people decide to rent, in the area of their choice, because they cannot afford to buy, but most certainly can afford to rent.
- More money for investing, which in turn improves the income, which in turn improves the lifestyle, therefore you are able to spend your retirement years doing what you want and not just be stuck at home, because you have no money to enjoy life and your retirement.
- As you have more funds available that are counted under the Income Test, you might find your Age Pension entitlement reduced, but it depends, First of all the asset allowance is much greater for non-home owners, that it is for home owners. Also, I can assist you with the Asset Test problem by applying specific strategies – I actually have a video: “9 ways to hide assets from Centrelink” – so have a look if any could apply to you.
- Rental assistance – don’t forget about that little benefit that is available to all recipients of Age Pension, which could be a great help in meeting your ongoing rental payments.
Housing costs will be part of your retirement budget, whether you rent or own.
When deciding whether you should rent or own, you need to decide what is the main reason for your decision – emotional stability and security of having your own piece of the land, or lifestyle, flexibility and diversity of investing.
Here is the article you might be interested in:
By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
