Should you Rent the place you live, or should you buy it? Rent or buy, buy or rent – which is best?
We’ve been programmed to think the money you spend on rent is just thrown away each month. It’s dead money, a complete waste. All you’re doing is paying off someone else’s mortgage for them.
But what if that’s not true? Screw it, let’s find out.
I’m writing this for anyone renting that’s been told you should buy. Or for anyone who has bought and who feels trapped by the commitments.
I’ve been on all sides of this table. I’ve rented, I’ve owned, I’ve owned rental properties. I don’t have an agenda either way, I just want to see what the numbers look like. Cos I’m a nerd.
But as someone who has been involved in finance and property for the last 14 years, I’ve seen enough to know that there is rarely a straightforward answer.
Now, before I start, let’s all agree on something. There are a shit load of reasons why you might want to own where you live. There are a shit load of reasons why you might want to rent where you live.
I could go on, but I’m bored already. Whatever reason you currently have for wanting to rent or buy, then add that to the list.
Unless it’s because of any of the following reasons;
Let’s actually look at the numbers of the two options side by side.
Are these assumptions always going to be accurate? No. I can already sense the smug bellend who has a great fixed rate mortgage at 1.29% and the cocky prick who has made 12.3% per year from their investment portfolio.
…. but it’s not going to be a million miles off the real-world scenario.
People are going to moan about 4.8% as a yield. Expensive (relatively) houses tend to yield lower than cheaper houses. So, if you’re expecting that figure to be more like 6%+ you’re shit out of luck. You’ll get those kinds of figures on sub £125,000 more often than over £125,000 places.
If you think 4.5% interest rate on a mortgage is bullshit, check out historic interest rates over the last 30, 50, 100, 2000 years. We’ve been in a ridiculously low interest rate environment for the last decade. It’s not going to stay like this. Deal with it. 4.5% is about average over the long term.
Think a 5% return on your investments over time is rubbish? You might be right, but it’s achievable for most people over time. Think it’s way too high? Then we need to talk….
Now we’ve got that out of the way, what’s it going to cost to live in each place for the next…. let’s assume you’re going to take out a 30-year mortgage.
30 years’ of numbers to analyse. Yay!
You rent for 30 years and you pay your mortgage on an interest only basis for 30 years.
You’re over £100k better off owning rather than renting.
If that’s the conclusion you want, then stop reading. Everyone who rents is an idiot and everyone should aspire to own because it’s the only sensible thing you can do!
Let’s not forget about the money you put down as a deposit. If you’re renting you don’t have to put £62,500 into buying your property. You can invest it elsewhere instead.
Ah. OK. Now you’re better off by £137.15 per month because you rent instead of own. Errrrm…
But but but, what about capital appreciation of the house I own? At least it’s going up in value! You stupid renting hippy.
Two things on this one,
1. Don’t be rude
2. What possible difference does it make if the house you live in goes up in value?
You buy a 3-bed semi for £250,000. In 30 years’ time it’s worth £1,000,000 (i.e. it doubled every 15 years).
Great! Sell the property and you’re a millionaire!!! OK, you had an interest only mortgage, so you’re only a £812,500 – onaire. But still.
Well done you. You’re a genius and the renter just an asshat.
But… you still need to live somewhere. Let’s say you want to buy somewhere like you live now. Maybe it’s a bit smaller cos the kids have pissed off, but you want to live somewhere a bit nicer.
A 2 bed flat down by the marina is going to cost you £1,000,000. Yours wasn’t the only property that doubled every 15 years.
You’re no better off.
As a homeowner, it’s on you to fix everything that goes wrong with your property, and to tart the place up when it needs it.
As a tenant, you call someone up and tell them the boiler is broken, and it’s up to them to fix it and pay for it.
If a place starts looking old and crappy, you can either ask for it to be redecorated, or you can just move somewhere shiny and new.
As we’re using a 30-year timeframe, here are some typical expenses you’d come up against as a homeowner.
Some people are happy with a 30-year-old kitchen, others would replace it every 5 years. I’ve been conservative and assumed most things would just be done once within the 30-year timeframe. Apart from redecoration, I’ve assumed once a decade for that. Fair?
That’s another £155.56 per month of costs as a homeowner instead of a tenant.
Here is where we stand using the above information.
So by using real life numbers we’ve managed to go from it being a no-brainer that you’d be £100k better off being someone who owns their own home, all the way to being £100k better off being a renter instead of an owner.
I’m not the first person to question the logic of renting instead of owning, so if it’s such a bad idea, why does anyone own?
Well, the fact your property does go up in value over the 30 years can’t really be ignored because of the way our retirements are usually funded.
Let’s go back to your £1,000,000 house. You sell it and have £812,500 left after you’ve paid your mortgage. What most people are taught and forced to do is to buy a place for £500,000 (so a smaller property in a shitter part of town) and use the £312,500 to fund their retirement.
Another option would be to sell up and use the £812,500 to rent a property for the rest of your life instead. So long as you don’t live for another 68 years, you’ve got enough to pay £1,000 a month for a while.
The other thing I’ve not covered is inflation. I’ve assumed some house price inflation, but not inflation in rent. Your mortgage costs (assuming you could fix for 30 years) would remain the same at £703 per month – but your rent is likely to go up over 30 years.
On the other hand, I would argue that the £62,500 (i.e. your deposit) could be used to buy investment properties instead of a property to live in. So you would have the same increase in property value and the same £812,500 – but you would have avoided the liability for maintenance of the property you lived in.
I am doing what’s right for me. Which almost inevitably won’t be right for you.
I currently own property that I rent out and have just sold the property that I owned personally.
My plan – and I can guarantee you this will change – is to own property as an investment, while renting the property I live in myself.
I can move where and when I want. I can move to fancier places if I want to, or I can reduce my costs if I need to with relative ease.
I can benefit from the rise of house prices in the UK, and let someone else pay my mortgage for me. If I have a boiler break in my own property, I call the landlord. If I have a boiler break in my rental property, I have to pay for the boiler to be fixed – but the tenant is paying me a profit each month so this covers the cost over the long term.
If we fast forward 30 years, I could sell everything I own, and use the increase in house prices to fund my lifestyle in retirement.Using the above numbers, here’s what it might look like;
Here’s the conclusion if we look at all of the options together in the simplest format…
Numbers can be manipulated to show anything you want. I’ve just shown how to you would be £100,000 better off over the 30-year term through renting.
Then how you would be £500,000 better off by owning instead of renting.
It just goes to show that someone with an agenda can prove anything they want depending on where they stop doing the analysis.
The main point of this whole piece isn’t to convince you to rent instead of buy. Or buy instead of rent. Everyone is different, everyone has different needs and desires and requirements. All I want to do is challenge the accepted wisdom that assumes it’s better to own than buy.
Know your numbers, run them and see for yourself. Ultimately, do whatever you want. I don’t care. Just have a good reason why you’re doing.
If the prospect of running numbers like this makes your head explode, or the idea of investing for a 5% return, or buying investment properties terrifies you, then it might be worth reaching out to see if it’s worth us working together.I work with a small number of people one on one to help them take control of their finances and start investing in a simple, realistic way. If it is of interest, get in touch.