PDA

View Full Version : Better off to rent than to buy property?



Spyder90
18-10-2011, 04:35 PM
Through my youth I've always heard people tell me the wonders of owning property. How people have bought a house for $X and sold for $2X etc. Until recently I've thought wow what a great profit! Right? Why would you rent it seems like you would be throwing your money away. Now I've realised that maybe house owners don't tell you the whole story of what owning houses really costs them, and that they too have a throw away amount through interest, house insurance, selling commission upkeep etc.

I've been furiously saving, and of course investing to, and have reached a decent house deposit. I have had successes investing (knock on wood) and have been thinking that I could be better off waiting later to buy a house and just carry on investing. It seems to make sense to me.

I have been struggling to run the numbers because I have had no experience with houses myself and most people seem one eyed when it comes to housing.

Has anyone thought along similar lines and come up with any thing they would be able to share with me to help me at my cross roads.

Btw Hi I'm Caleb and I've read these forums, mainly on the NZX, for a couple of years now and really enjoy seeing what everyone has to say

fungus pudding
18-10-2011, 04:44 PM
Through my youth I've always heard people tell me the wonders of owning property. How people have bought a house for $X and sold for $2X etc. Until recently I've thought wow what a great profit! Right? Why would you rent it seems like you would be throwing your money away. Now I've realised that maybe house owners don't tell you the whole story of what owning houses really costs them, and that they too have a throw away amount through interest, house insurance, selling commission upkeep etc.

I've been furiously saving, and of course investing to, and have reached a decent house deposit. I have had successes investing (knock on wood) and have been thinking that I could be better off waiting later to buy a house and just carry on investing. It seems to make sense to me.

I have been struggling to run the numbers because I have had no experience with houses myself and most people seem one eyed when it comes to housing.

Has anyone thought along similar lines and come up with any thing they would be able to share with me to help me at my cross roads.

Btw Hi I'm Caleb and I've read these forums, mainly on the NZX, for a couple of years now and really enjoy seeing what everyone has to say

My opinion for what it's worth is to buy a house if you are planning on staying in your curreny location for the foreseeable future. Economic considerations can be analysed to death, but are minor in the overall scheme of things.

lou
18-10-2011, 06:08 PM
Through my youth I've always heard people tell me the wonders of owning property. How people have bought a house for $X and sold for $2X etc. Until recently I've thought wow what a great profit! Right? Why would you rent it seems like you would be throwing your money away. Now I've realised that maybe house owners don't tell you the whole story of what owning houses really costs them, and that they too have a throw away amount through interest, house insurance, selling commission upkeep etc.

I've been furiously saving, and of course investing to, and have reached a decent house deposit. I have had successes investing (knock on wood) and have been thinking that I could be better off waiting later to buy a house and just carry on investing. It seems to make sense to me.

I have been struggling to run the numbers because I have had no experience with houses myself and most people seem one eyed when it comes to housing.

Has anyone thought along similar lines and come up with any thing they would be able to share with me to help me at my cross roads.

Btw Hi I'm Caleb and I've read these forums, mainly on the NZX, for a couple of years now and really enjoy seeing what everyone has to say

Alot of people on this forum will be on the side of buying a house.

Kees
18-10-2011, 09:21 PM
Why would you tie up capital if you are succesful at investing just for the privilege of owning a house, invest in commercial property if you want to be a land lord.
or stick with what your doing and rent build up a large porfolio and if you think then you need your own house buy out of the small change from your investments.
just my 2 cents worth.

duncan macgregor
19-10-2011, 07:39 AM
I know lots of well off middle class people who have only had menial task jobs in real life, but are extremely rich never the less through property investment. I also know a few business people who have lost the lot, along with a few others that lost all their hard earned savings investing. I dont know anyone that lost the lot, or regreted buying investment property. We have entered the stage where corporate greed feeds off the gullible investor, so unless you are amongst that lot or know the inside story then be carefull. Winston Churchill said, [Their are only two types of fools in this world, those that give advise and those that take it]. Far be it for me to be classed as a fool giving advise to a stranger.
Property investers must be practical people for a start so stick to what you know best. Macdunk

Lizard
19-10-2011, 08:07 AM
Through my youth I've always heard people tell me the wonders of owning property. How people have bought a house for $X and sold for $2X etc. Until recently I've thought wow what a great profit! Right? Why would you rent it seems like you would be throwing your money away. Now I've realised that maybe house owners don't tell you the whole story of what owning houses really costs them, and that they too have a throw away amount through interest, house insurance, selling commission upkeep etc.

I've been furiously saving, and of course investing to, and have reached a decent house deposit. I have had successes investing (knock on wood) and have been thinking that I could be better off waiting later to buy a house and just carry on investing. It seems to make sense to me.

I have been struggling to run the numbers because I have had no experience with houses myself and most people seem one eyed when it comes to housing.

Has anyone thought along similar lines and come up with any thing they would be able to share with me to help me at my cross roads.

Btw Hi I'm Caleb and I've read these forums, mainly on the NZX, for a couple of years now and really enjoy seeing what everyone has to say

Hi Caleb,

I thought like you when I was young too. I did not buy a house until after we had travelled, saved a deposit (half the value of the house) and were ready to start a family. Unlike you, I wasn't particularly savvy as an investor, and saved the money in a no-interest current account, as was never sure when I might be ready to buy!

After buying a house, I did the calculations for a year and figured out that the only advantages in buying earlier were enforced saving and the probability that I would buy a larger property than what I was used to renting. Since then, I have come to resent some of the demands of owning a house - maintenance and the sheer hassle of selling/rebuying/moving on - while not being willing to trade off the security and return to renting.

Buying a house can make sense at the beginning of an inflationary period, as the capital gain exceeds the long-run average and leverage is easy to obtain. My father also believed that of all the investments he owned in his lifetime, his investment property performed the best, but ONLY because he did all the maintenance himself. I think that is true too - those who are prepared to put in a lot of unpaid labour effectively give themselves a secondary job that they get repaid for when they sell. I think this, plus the enforced saving are contributory reasons that many have got rich on property.

robo
19-10-2011, 01:14 PM
Hi Caleb,

I thought like you when I was young too. I did not buy a house until after we had travelled, saved a deposit (half the value of the house) and were ready to start a family. Unlike you, I wasn't particularly savvy as an investor, and saved the money in a no-interest current account, as was never sure when I might be ready to buy!

After buying a house, I did the calculations for a year and figured out that the only advantages in buying earlier were enforced saving and the probability that I would buy a larger property than what I was used to renting. Since then, I have come to resent some of the demands of owning a house - maintenance and the sheer hassle of selling/rebuying/moving on - while not being willing to trade off the security and return to renting.

Buying a house can make sense at the beginning of an inflationary period, as the capital gain exceeds the long-run average and leverage is easy to obtain. My father also believed that of all the investments he owned in his lifetime, his investment property performed the best, but ONLY because he did all the maintenance himself. I think that is true too - those who are prepared to put in a lot of unpaid labour effectively give themselves a secondary job that they get repaid for when they sell. I think this, plus the enforced saving are contributory reasons that many have got rich on property.
some good points Lizard............... property has been a real winner over a long period of time , Im not going to get into this one except to ask if anyone thinks long term property will appreciate steadily as it has in the past and if not, why it wont?

fungus pudding
19-10-2011, 01:40 PM
some good points Lizard............... property has been a real winner over a long period of time , Im not going to get into this one except to ask if anyone thinks long term property will appreciate steadily as it has in the past and if not, why it wont?

It won't in the next twenty years or so. It's way out of kilter now in relation to earnings, and they are not likely to have the huge growth of earlier decades like say the seventies when real estate was the only way to go. In those days it was easy for a young fellow to build a decent income and retire in as little as five years, and a few did. Nowadays I know several bods who have around 15 - 20 properties or more, and still need a job or another income. Fair enough to buy for your a roof over your own head, but they are no longer an investment and it will be a long time before they are again.

robo
19-10-2011, 04:38 PM
It won't in the next twenty years or so. It's way out of kilter now in relation to earnings, and they are not likely to have the huge growth of earlier decades like say the seventies when real estate was the only way to go. In those days it was easy for a young fellow to build a decent income and retire in as little as five years, and a few did. Nowadays I know several bods who have around 15 - 20 properties or more, and still need a job or another income. Fair enough to buy for your a roof over your own head, but they are no longer an investment and it will be a long time before they are again.

I hope you are wrong FP, what makes you think this will happen now when it hasnt happened in the past 70 years or so?

Halebop
19-10-2011, 06:19 PM
Fungus Pudding I think you'd still have to class a real asset like domestic property as an investment, it just may not be a great one.

Robo try the reserve bank inflation calculator and pick an era of malaise. The obvious one that came to me was 75 to 84 (The youngest Baby Boomers were only 11 in 1975 so they weren't interested in purchasing property). General CPI was estimated at +237% during this high inflation period but property was +187%, meaning it went backwards in real terms. Conversely wage inflation was +217%, showing that relative affordability may not be a driver of property performance (Apologies to ANZ and their affordability index and hence my reference to the 11 year old baby boomers).

While property will continue to inflate it will probably underperform recent historical norms and if we get a dose of low growth and inflation, the hedge like qualities of real estate will prove a bit false as the 75-84 era attests. The exception may be small dwellings which are both more afordable for older Gen Ys and a likely transition for under-retirement-funded Baby Boomers releasing capital from their largers home. Those with debt will probably benefit from the relative deflation of money, making property profitable still, but if inflation gets high interest rates will suck cash flow dry so nobody will be feeling richer even if they are on paper.

I'd personally prefer to position my money for above system growth than below - this could include real estate but will likely require special situations rather than that macro approach that would have worked in the 90's and early to mid 00's.

To respond to Spyder's original question: Anyone with poor saving habits or no investment sense is better off being forced to pay a mortgage each fortnight - at least they will have something to show for it in 10 to 20 years. Anyone will discipline and ability has options that can go wider than residential real estate with a mortgage.

POSSUM THE CAT
19-10-2011, 06:20 PM
Robo The rents in the past would more than pay all costs & pay off the mortgage. Rents today will not go anyway near it at todays low interest rates. Let alone the amount you would have to put in at normal interest rates. My first rental mortgage was $16.21 per fortnight on a ten year term. Rent was $26.00 per fortnight this was the early 1970s Nowdays the rent would in most cases barely cover the interest & property was increasing at afar greater rate than now.

fungus pudding
19-10-2011, 07:21 PM
I hope you are wrong FP, what makes you think this will happen now when it hasnt happened in the past 70 years or so?

The way up has never been in a straight line. Never will be. I've always liked this graphic illustration from a couple of years back.
http://www.youtube.com/watch?v=kUldGc06S3U&list=FL6wL-81Tq_7jpCDwWjwY_hA&index=36

When analyzing prices over a few decades remeber the more modern a house/building is the better equipped it will be, and look hard at capital and maintenance costs other than purchase. e.g. has roof been replaced in the time analyzed? how many kitchens? Bathrooms? Recarpeted? It's never ending.

fungus pudding
19-10-2011, 07:26 PM
Fungus Pudding I think you'd still have to class a real asset like domestic property as an investment, it just may not be a great one.



Sure, but the returns are not simply financial.

fungus pudding
21-10-2011, 04:19 PM
Firstly, house prices will not continue to appreciate in the same way as they have over the last 20-30 years. Demographic changes practically guarantee that. Consider this:
- in the past 30 years the average household income has shifted from a single income, to a double-income household as women went to work and stopped being stay at home mums, thus fuelling the ability of a household to service a much larger mortgage, and driving up house prices. Unless polygamy becomes legal (or children start living at home forever), there is no way that a double income household is going to become a triple or quadruple income earning household. So the ability to service ever larger mortgages is now capped, and thus prices are also capped.
- in the past 10-20 years the baby boomers hit their peak income earning abilities, and enabled them to service multiple negatively geared property mortgages as they 'saved" for their upcoming retirement. The influx of boomer property investors into the market drove up prices, now the trend will reverse as boomers sell property investments as they retire. Retirees with no income cannot service negatively geared property investment mortgages.
- the crash in share markets over the last 10 years has decimated many super funds, investments and savings. Retirees will be forced to get cash to fund their lifestyle by unlocking their property investments, this means selling up (unless reverse mortgages suddenly become all the rage, but in the absence of capital growth most banks will steer clear of those anyway).

So anyone who thinks that history will simply repeat ad infinitum, needs to rethink.

If you are good at investing, then I suggest you put away every spare cent you have and invest it until you have enough to buy a house outright, with cash. Then buy yourself a home that you will be happy living in for the next 10 years or so. Then take an interest only line of credit on the house to reinvest back into the market (assuming you can get a return on investment over and above the cost of borrowing). This makes your mortgage payments tax deductible. So you can have your house, make low payments on an interest only tax deductible mortgage, and receive a cash income (or capital growth) on top. This is called having your cake and eating it too :-) Another advantage of doing it this way is that if you lose your job or can no longer work you can simply sell your investments and pay back the mortgage, you wont ever lose your house to the bank.

The hard part is accumulating the cash in the first place - achieve this, and everything else is a breeze. It took me 8 years.

Spot on. I first started investing in early 70s and only in residential property. In no time I was able to make a good living at it. I got out of that a few years back and hold only commercial property. Times have changed, and will not be seen again for one hell of a long time. This is compounded by the fact that buying res. property as an investment now means competing with all sorts of brainwashed heroes who think it is easy - well it ain't any more.

Sideshow Bob
21-10-2011, 08:27 PM
Then buy yourself a home that you will be happy living in for the next 10 years or so. Then take an interest only line of credit on the house to reinvest back into the market (assuming you can get a return on investment over and above the cost of borrowing). This makes your mortgage payments tax deductible. So you can have your house, make low payments on an interest only tax deductible mortgage, and receive a cash income (or capital growth) on top. This is called having your cake and eating it too :-)

Nice post KW, but can you explain a little the line of credit and then making mortgage payments tax deductible? Don't really understand - would you have to trade as a company?

I got home ownership in just under 10 years. Except the other half bought the house. I just paid for it......


Cheers
SSB

lou
22-10-2011, 10:32 AM
Hi Sideshow Bob.

The tax deductibility of a loan depends on the purpose of the loan. For example if you get a mortgage to buy a house to live in the interest expense is a personal expense. If you get mortgage for the purpose investing the interest expense is a business expense and therefore tax deductible.

You don't need to be trading as a company to claim interest expense. You can claim it in your own name. If you have equity tied up in your house you could quite easily use a revolving credit facility for investing.

fungus pudding
22-10-2011, 01:38 PM
Hi Sideshow Bob.

The tax deductibility of a loan depends on the purpose of the loan. For example if you get a mortgage to buy a house to live in the interest expense is a personal expense. If you get mortgage for the purpose investing the interest expense is a business expense and therefore tax deductible.

You don't need to be trading as a company to claim interest expense. You can claim it in your own name. If you have equity tied up in your house you could quite easily use a revolving credit facility for investing.

I'll just poke my nose in and qualify that. The investment has to be likely to produce taxable income in the foreseeable future. IRD have declined interest claimed where there is no chance of profit from the yield, and have deemed the investment to be purely speculative, or for capital gain.

lou
22-10-2011, 03:14 PM
I'll just poke my nose in and qualify that. The investment has to be likely to produce taxable income in the foreseeable future.

The investment has to have the intention of producing taxable income.


IRD have declined interest claimed where there is no chance of profit from the yield, and have deemed the investment to be purely speculative, or for capital gain.

If investment is purely speculative they would be consider a trader, and would have to return profits or losses on the eventual sale. You would still be able to claim the interest.

It is the doggy situations that you have to steer clear off. The kind of situation are only done for a tax benefit, and will never make a profit.

fungus pudding
22-10-2011, 06:03 PM
The investment has to have the intention of producing taxable income.



If investment is purely speculative they would be consider a trader, and would have to return profits or losses on the eventual sale. You would still be able to claim the interest.



Not quite. I was involved with one instance of a commercial property with a long lease without a rent review. The owner was certainly not a trader - never sold anything - yet his interest claim was denied. If you are familiar with the AMP/Woolworths properties that was generally the case also. The IRD used to send form letters asking about residential real estate investments, e.g. was it rented to a relative, how long before it was expected to produce a profit etc, althought they seem to have given up on that lately.

Sideshow Bob
22-10-2011, 08:30 PM
Thanks FP & Lou for your time in answering my query.

Cheers
SSB

HIDDENGEM
24-10-2011, 12:21 AM
It dependson the situation, risk level, income level, age, job or income security in thefuture.

Just like otherexperts in other investment areas those who good in property will do betterthan others.

First homebuyers should not buy properties when they see prices are in peak level.

It isbetter to avoid any type of asset when they become overvalued.

We shouldhave idea about property cycle and business cycle as well.

In someperiod some assets can appreciate rapidly and in some period these assets cango down rapidly surprise to many. Through out the history this happened to manyassets such as gold, shares, property and currencies. Time to time there werereal estate, credit, gold and currency crisis globally.

After peakin 2007 during last two years we saw rapid price depreciation in property marketin many countries except New Zealand and Australia. We have uncertainty in the property marketnow. Whether to buy now or later.

Owninghouse is a good thing. Instead of paying rent we can have our own house by payingmonthly instalments


NB:

My opinions are not intended as financial advice. Pleasedo your own RESEARCH.

fungus pudding
24-10-2011, 04:55 PM
Now you know why I have an obsession about dividend paying stocks :-)

I also think you need to be careful about revolving credit loans - either those, or offset ones, cant remember which, but one of them does not qualify as deductible. I prefer the simplicity and separateness of an interest only line of credit, with the interest paid off in full each month from transfers from my savings/dividends account. The beauty of current markets is that you can be positively geared into the market. Not something you can say about residential property (at least in Australia).

It doesn't matter a toss whether it is revolving credit, floating, fixed or a loan from Uncle Fred. Neither does it matter what security money is borrowed against. The test for deductibity is the intention to gain income.

lou
24-10-2011, 05:25 PM
Now you know why I have an obsession about dividend paying stocks :-)

I also think you need to be careful about revolving credit loans - either those, or offset ones, cant remember which, but one of them does not qualify as deductible. I prefer the simplicity and separateness of an interest only line of credit, with the interest paid off in full each month from transfers from my savings/dividends account. The beauty of current markets is that you can be positively geared into the market. Not something you can say about residential property (at least in Australia).

Hey KW

As Fungs Pudding pointed out deductibility depends on the intention of the loan.
Where revolving credit loans and offset loans fall down is the intention of the loan can be lost if you are using it for business and personal expenses. If you are only using it for business it will be 100% deductible.

Spyder90
25-10-2011, 05:59 PM
Thank you everyone for their different thoughts the perfect insight I needed. All the best to all

voltage
26-10-2011, 08:06 PM
fungus pudding your thoughts on borrowing to purchase dividend income shares are interesting. I have done this and include asx stock like banks but the problem with asx stock you cannot use franking credits and you pay tax twice on the dividend, once in aussie and then again in NZ. Shares are more volatile than property and it is very important to have a long term horizon.