Choosing between renting and buying

With interest rates at 49-year lows many people are asking whether it’s better to buy a home or continue to rent. There’s no one right answer as it depends on your financial circumstances and lifestyle priorities. 

To help you determine what’s best for you and your family, there are three important questions for you to consider: do you expect to be living in the same area or suburb for the long term, can you actually afford to buy where you want to live and is your current lifestyle more important than making sacrifices for future financial benefit?

Long-term living

People can get so caught up in the idea of owning their own home that they think for the short term rather than the long term. They dream of their own piece of paradise and often forget to evaluate their plans for the coming years. Before jumping in boots and all, it’s important for prospective home buyers to determine if they are likely to be based in the one area or will need to relocate for work or other commitments.  Another consideration is the size of your family.  A one-bedroom apartment for you and your partner is not going to be sufficient in three to five years time if you plan to add children into the mix. 

The reality in these scenarios is if you’re likely to relocate jobs or outgrow the space by increasing the size of your family within a few years then you’ll either need to rent out your home or sell it.

If you sell it then you’ve wasted a good 7 – 10% in buying and selling in and out costs that could have been used to invest in the future. I don’t believe in buying and selling unnecessarily and with some forethought you shouldn’t have to. 

If, on the other hand, you decide to rent it out then you have to hope that the property is appealing to the wider rental market – after all you didn’t purchase it as an investment property but as a home. 

However, buying your own home now may be absolutely the right decision for you and your family particularly if you know the area well in which you want to live and are confident you will be happy there for the long term.

Count the cost

Another consideration is to weigh up if you can afford to buy a suitable home in an area where you want to live.  If the answer is ‘yes’ then you may be on the way to becoming a home owner. However if the answer is ‘no’ then you will need to make sacrifices as part of your decision. 

Here, you have several choices. You can: buy in another area; buy a less suitable home in your chosen area; or rent in your chosen area and purchase an investment property elsewhere.

If you choose to buy in another area, then you should take the time to fully understand how this decision will impact on your lifestyle.  I’ve seen people so desperate to own their own home that they are prepared to travel two or more hours a day to and from work in order to buy an affordable home. They have chosen to give up this leisure time with their family and friends as part of the home buying deal.  If you’re considering this option then make sure that you go into it with your eyes open.  Consider doing a test drive or public transport commute from the prospective house into work and back during peak hour for a week so that you truly understand how much time you are going to spend travelling each day. On the other hand, if you decide to purchase a less suitable home in your chosen area then consider a trial run.  If you really need a three-bedroom house but you think you can settle for a two bedroom apartment then why don’t you rent a two bedroom apartment for six months to see whether you and your family can cope with the space restrictions? Spending a couple of thousand on removalist costs is a lot less than paying tens if not hundreds of thousands in stamp duty.

Finally, you may decide to have your cake and eat it too by renting in your chosen area and purchasing an investment property in a targeted area for good capital growth and rental returns. In this case, it won’t matter if your family expands and you need more space or you relocate your job as you can move fairly easily to a new rental property. In addition, your rental property comes complete with tax deductions and is likely to help you get ahead faster financially if set up correctly.

Live your life

I believe if your aim is to build a solid financial foundation for you and your family then rent where you want to live and invest in property where it’s good to invest. This strategy can be particularly effective for young people who are happy to have some flexibility with their lifestyle and live in share accommodation, thereby cutting down on their living expenses.  If you can start this strategy in your early working years, then you can build up a property portfolio and set yourself up to purchase your own home in an area where you want to live down the track.

For first-home buyers, it’s particularly important to examine all the differences between buying a home and going down the investment track. It can be too easy to take the money up front such as the financial incentives on offer for first home buyers rather than weighing up what’s going to be best for you in the long term.

The final word

Unless you are in a strong financial position that allows you to buy what you want, where you want it, then you need to take the time to weigh up all the options when considering purchasing your own home. Understand how your decision will impact on your lifestyle and your future financial position so that you go into any property transaction with your eyes open.