November 15, 2023
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A while ago, I posted the following on my socials…
I thought this was a fairly mild and straightforward statement. But as it turns out, several people strongly disagreed with it.
Not only that, but they couldn’t even fathom how it could possibly be true.
Now, I’ll probably still write a fully updated Rent vs Buy post soon. But since my comment prompted such a mixed response, I thought it was worth unpacking.
If your initial reaction is, “Dave, how the hell can you say renting is more predictable for your finances?” then trust me, you’re not alone! But stick with me while I explain why it’s an accurate statement.
As you know, any discussion around property quickly becomes emotional and damn near religious. Reasoning and logic goes out the window as people begin furiously frothing at the mouth if you dare question their beliefs.
So, let me clear things up before I begin. Here’s what I’m NOT saying:
— Renting is better than owning
— Renting is easier and less stressful
— Owning is worse for your finances
— Owning doesn’t come with great benefits
— The current rental market is a breeze
— You should buy or rent based on one factor
— The most important metric to consider is cashflow
Again, I’m NOT saying any of these things.
My view is simply this: I believe renting makes your cashflow smoother and your personal finances more predictable, while owning makes your life smoother and more predictable.
In this post, I’ll show you exactly why. Hopefully we’re on the same page so far. As we continue, let’s try to put our personal preferences aside and just consider the specific points being discussed.
And the context here is the FIRE community. People who are saving and investing on their way to freedom. Not an everyday person or a struggling retiree. Yes, I understand those cases, hence the points above!
My focus here is the broader concepts which are largely true most of the time. I understand we’re in a more unusual market right now which makes renting trickier than is typically the case.
When we look back at this article in 5 or 10 years time, I believe these fundamentals will still hold, which is why I’m writing it. Let’s begin.
My first assertion is that rents are more stable than interest rates.
Rents may rise 10-30% in a few years, but interest costs can rise 50-100%. Both are rare, but the magnitude is different.
According to SQM Research, in September 2020 (the low point), average capital city asking rents were $470 per week for houses and units combined. Asking rents are now $685 per week as of September 2023.
That’s an increase of 45%. Some areas will be more than this, and some less (it’s an average). By the way, the data shows similar growth between houses and units in case you were wondering.
Not great. But as you can see, recent moves do seem to be more of an anomaly.
Most of the time, rents simply trickle upwards over the years in a much steadier fashion. Long term renters and property investors will know that’s the case.
How about interest rates?
Well, about two years ago, when the RBA cash rate was zero, a common mortgage rate was around the 2% mark. Today it’s over 6%. That’s an increase of 200%.
With a rate of 2%, mortgage debt of $600,000 would attract say $12,000 of interest. The annual interest on the same debt at 6% is now $36,000.
Now, this is also somewhat of an anomaly as interest rates don’t usually rise this fast. But as we can see below, interest rates (and therefore mortgage repayments) are more erratic and less stable than rents.
It’s worth noting that due to the amortisation feature of mortgages, repayments haven’t jumped as much as the interest rate.
According to the CBA loan repayment calculator, a new 30 year loan with a 2% interest rate would cost $2,220 per month. Change that rate to 6% and the repayment is now about $3,600 per month. A 62% increase.
So, rents will rise for a longer period than mortgage rates. But interest costs for a homeowner fluctuate more over a shorter period, especially from year to year, but also throughout the year.
Takeaway: monthly costs are typically less predictable for an owner than a renter.
Most often they do, yes. Though much of the time, it’s by relatively small percentages.
We can see that in the SQM chart from earlier. It also shows that rents can and do fall sometimes too, but less frequently.
This feature doesn’t mean renting is less predictable. In fact, it’s the opposite. Most renters would expect that rents will increase each year, bit by bit, most of the time. Again, let’s separate the current market environment (the exception) from the general rule.
As an owner, we also know our expenses will go up too. Water rates, council rates, insurance, strata fees, labour costs, etc. We expect to pay more for these each year, though most of the time it won’t be a lot more. Yet in recent times, insurance, building materials and tradies have also become a lot more expensive in a short period.
If the rents go up too much for your taste or budget, you have the option (in most scenarios) of moving to something a bit more affordable.
Ah yes, the never-ending rollercoaster of instability. This is why I said owning makes your life more predictable.
I’ve actually spoken to many people who’ve lived in rentals for a surprisingly long time (5-10+ years). So they may be lucky, or it could be that renting isn’t as much of a revolving door as many people believe.
I think it’s the emotional annoyance of having to move (not having the choice) that inflates this story in our minds. Which makes sense, but leads us to mistake what the most likely scenario is.
That said, renters DO have to move more often. And there are costs associated with that which owners don’t have to deal with.
Let’s assume a ‘forced move’ every 2 years. What’s the cost to move? Perhaps $1,000. Our two moves in the last 6 years have been less, but you could add more for outsourced cleaning.
This equates to $10 per week. Even paid as a lump sum vs budgeted for, it’s a tiny dent to cashflow, which can be covered with the laziest amount already sitting in a transaction account. Especially compared to moving as an owner, who’s up for selling agent’s fees and stamp duty on the next home.
These two costs typically equate to about 6-8% of the property’s value. Assuming a $700,000 home, we’re talking $40,000+. Now I know you don’t pay for that out of your own pocket, which is precisely why it’s such a trap people don’t even think about. But this ends up manifesting in a higher mortgage balance, which adds to mortgage repayments.
Effectively, one move as an owner costs more than a lifetime of moving as a renter. Every time an owner moves, a chunk of their net worth disappears.
How many people think of it like that? Very few. Regardless of how we slice it, this also affects an owner’s cashflow, so there’s no escaping it (unless you never move of course). Which brings us to the next point.
Absolutely, solid argument. And you’ll add value to your home in the process. Not that this helps your cashflow, but a fair benefit nonetheless.
Also, unless we want to live in a home that’s falling apart, renovating isn’t even optional. Just like property investors, we’re forced to update our properties over time or they become pretty crappy places to live.
Renters definitely don’t get this benefit. But given we’re discussing cashflow, how does that aspect compare?
A typical home reno, in place of moving, will run into the many tens of thousands of dollars. If this is paid with cash, it’ll mean forgoing investment income that money could be generating. If paid with debt, it’ll mean higher mortgage repayments.
What about the renter?
While they can’t always control when they move if they like a place, they can decide to move to a different property. One which suits their changing needs or tastes.
If one place is getting a little tired, they can move to something newer. All for the minimal outlay of moving costs and a modest bump in rent. In fact, the renter can end up in a renovated property without the hassle of managing the works, or forking out huge sums of cash.
At this point, it sounds like I’m 500% in favour of renting and I’m about to sell my house. Nope. I’m simply providing another way to look at things. We often become so enamoured with owning we can often miss the other side of the story, which can have just as sound reasoning.
Renters might also mention they don’t have to fork out for ongoing maintenance issues or problems with the property, which gives them greater predictability with their finances.
True. But having expensive items you need to budget for actually proves the point.
The very act of setting money aside for random expenses is a perfect indicator of a situation with less predictable cashflow.
Now, you could say renters need to budget for moving costs. But as we’ve covered, that number is so small it’s a nonsense argument. It’s absolutely peanuts in comparison to the owner’s lumpy expenses.
Side note: one thing a renter may decide to set money aside for is having savings to pay bulk rent in advance as a ‘one up’ in trying to secure a new property (which can be highly attractive to a landlord).
In truth, ownership costs are often random and lumpy. Roof tiles deteriorate. You get internal pipes leaking. Fence needs replaced. A large tree becomes problematic. Hot water system dies. And so on.
So unless you know the exact condition of every part of your house, visible and invisible, along with its predicted lifespan, budgeting isn’t always feasible. Don’t get me wrong, budgeting will smooth out your cashflow if you manage to account for all scenarios, but that often means setting aside (and not investing) a lot more additional cash than optimal.
Funnily enough, many people will point to the ease of budgeting for costs as an owner. While others are quick to point out the ‘sudden’ costs of having to move as a renter 🤷♂️
Here’s the thing: what starts as a repair can easily turn into a mini renovation. One thing leads to another, and little ‘improvement’ ideas pop into our mind. The truth is, many of us spend way more on our homes than we care to admit. There’s a reason Bunnings is one of the largest and most profitable companies in the country!
Of course, this is optional. But you’ll have to override your psychology to firmly resist. When you own a home, it’s far too easy to get caught up in, “Oh, imagine if we did this” or “You know what would be nice…”
Renters don’t struggle with the desire for constant refining or improvement of the home, because they aren’t as emotionally (or financially) attached to the space they occupy.
To renters, the details and small annoyances of a home doesn’t really matter to them nearly as much. It’s usually ‘good enough’.
True. But fixed rates usually come at a premium to standard interest rates (sometimes a substantial premium).
If you happen to lock in a great rate relative to where interest rates go, repayments will take a big jump after a few years, as is happening now to many people who locked in ’emergency low’ interest rates during the covid recession (as I did).
So while it’s possible to fix your rate and create stable repayments, it’s a less natural state within the Australian mortgage market. The US, however, is different. It’s extremely common there for people to have 30 year fixed rate mortgages.
What about refinancing? It’s totally possible to negotiate a lower rate in many cases, which is excellent and highly recommended!
Two things to note:
1. It basically means you were overpaying in the first place.
2. It’s not a controllable outcome, has tight limits, and is not a continually repeatable trick.
There are deals, sure. But we can’t control how competitive (or not) the market is. And the more we ‘save’ here, the more we were likely overpaying in the first place 😅
Here’s a little summary of what we’ve covered in this post:
— Rents are more stable over a multi-year period compared to mortgage rates.
— Renting is a single payment of the same amount every time, typically for 12 months. Owning has lots of additional lumpy expenses (council, water rates, insurance, possibly strata fees including special levies etc.) which amount to many thousands and come at various times of the year.
— Owning has the responsibility of paying for all repairs, damages, maintenance, and upgrades over time, which are all erratic expenses. More random multi-thousand-dollar expenses. A renter has no such obligation.
— A renter can more easily control the cost than an owner. If rents rise too much in one area, they can move to a lower cost place, by varying size or location for a minimal outlay. If interest rates or expenses become too high for an owner, they’re up for at least $30k-$50k+ to sell and downsize.
— A renter can more easily switch housing choices according to their income, work location, lifestyle desires, and space needs at the time. All at a miniscule cost compared to an owner, where transaction costs take a chunk out of their net worth and results in higher mortgage repayments even if the new home is of equal value.
— Renters are likely to make more logical financial decisions regarding their home since they aren’t as attached to the property. Owners are far more likely to overspend to try and personalise and refine their living space.
Bottom line: owners have many more ways their cashflow can be affected by various costs. Their monthly and yearly cashflow is beholden to many more forces outside their control (including government agencies, weather events, building issues, trade and material costs, and more).
Renters have one relatively predictable payment, which is more easily modified, flexible, and controllable, despite rents going up over time. All this results in smoother and more flexible finances for the renter, on average.
Much of the pushback on my social media post mentioned at the start of this article were along the lines of:
“But imagine renting when you’re 75 years old”
“But I have this relative who can’t find a place to live”
“But you’re completely at the whims of the landlord who can kick you out any time!”
“How can you possibly say that when we have an insane rental crisis!?”
The idea posed hurt their ears. Most of the pushback is simply emotional reactions to an emotional topic. Which is totally understandable!
It may have always been this way, but I’ve noticed something interesting lately: people tend to react to how a statement makes them feel, rather than whether the idea actually has merit or not. Just pure initial gut reaction.
So I don’t think people were logically arguing owning is more predictable for your personal cashflow than renting. I think they’re unwittingly just arguing how they feel about the bigger picture of renting, and that owning = maximum stability. When you combine that with a very tight rental market and some scary stories, you’ve got a recipe for the belief that renting = maximum fear and insecurity.
The emotionality of housing as a topic makes it hard to see the various angles through clear eyes. In general, many of us argue points simply because it fits with our own life decisions. We don’t want the mental discomfort that comes with acknowledging that the alternate choice could also be a good one. This conflict isn’t nice to sit with, because it causes us to question our decisions.
I hope this article helped shed some light on another angle to look at renting vs owning. I stand by my original comment:
Owning makes your life more predictable, renting makes your finances more predictable.
The seemingly high control of owning comes with many responsibilities. The seeming lack of control with renting comes with many freedoms.
I get that this is counterintuitive. From the outside, it looks as though renting generally comes with no control over your housing situation. But behind the scenes, most of the time renters have more control over their destiny than it appears, especially those who are financially savvy (which is who this post is for!).
Again, I’m not saying renting is better. Just playing devil’s advocate here and fleshing out these points for a more complete picture of my comment.
Now sure, there are exceptions to everything, but as a general rule these points are accurate. Before you send me a bunch of angry comments, go back up and read the caveats at the start of this post 😉
Don’t get me wrong. I agree with the pushback, to a point. There’s few things more stable than ending up with a paid off house. So even though it wasn’t the comparison here, it’s fair to say that owners eventually get the last laugh, with a unique level of predictability. But in most other scenarios, renting is far smoother from a cashflow perspective.
So, as much as renters are reminded how shaky and uncertain their future is (in fact, it’s rammed down their throat as part of the endless victimisation circus that is the media), I want to remind you of something very important…
While a house is a valuable asset that eventually saves you from paying rent, you definitely DO NOT need to own a house to become wealthy or retire early.
If you’re good with money, both options work just fine!
Here are some resources you may find useful on your wealth building journey:
Mortgage broker: My personal broker of 10 years is More Than Mortgages. Highly rated and award winning, Deanna and her team been super helpful over the years and can assist you with anything home loan related, including refinancing and debt recycling.
Sharesight: A great portfolio tracking tool for share investors, and free for up to 10 holdings. It tracks all dividends, franking credits and capital gains, which is incredibly helpful at tax time. Saves me a lot of time and headache!
My book: After 5 years and hundreds of articles and podcasts, I decided to distill everything down into an easy to follow book. Designed as a complete roadmap to achieving financial independence and retiring early in Australia. Available in paperback, ebook, and audio.
Just so you know, if you do use these resources, this blog may receive a financial benefit at no extra cost to you (thanks in advance). I only ever recommend things I genuinely believe in.