Renting vs Buying: What are the big differences?
Buying your very own home: it’s a dream harboured by most Kiwis, but it’s no small decision. In fact, for most people it will be the single biggest purchase they’ll ever make.
21 July 2022
Those who don’t own a home will need to rent one. While ‘rent money is dead money’ is a popular cliché amongst seasoned investors, there’s far more to it than that. There are a wealth of reasons why renting might be right for you, just as there are a wealth of reasons to buy your own home. Interestingly, home ownership rates in New Zealand are currently at their lowest level in 70 years, with 64.5% of Kiwi households owning the property they live in, down from a peak of 73.8% in 1991. Renting, meanwhile, is more popular than ever, and for a number of reasons. There are similarities between renting vs buying a house. Both require regular income (though it will be spent on different things: mortgage vs rent), and you’ll need to maintain the property to some degree in both situations. More notable are the differences in renting vs buying in NZ, which will be the focus here. Let’s take a look at the pros and cons of both, in an effort to clarify which of the two is right for you given your current circumstances.
Renting a house
To say that renting is the act of paying off someone else’s mortgage or funding someone else’s retirement is to seriously oversimplify things. Sure, you may not be building equity for yourself when you pay rent, but much of your rental payment will go to things other than the landlord’s mortgage, like maintenance, property management fees, council rates, taxes and other bills. You need a place to live, and renting grants you exactly that. Unlike buying, renting is also an option for pretty much anyone, as you’re only asked to put down a small bond, rather than a deposit that is often 20% of the value of the property. There are a wealth of very good reasons that you might choose to rent. Perhaps you don’t have long-term plans to live in the area you currently call home – you might have moved there for work or to gain some life experience. Perhaps you don’t currently have the necessary funds to buy your own home. Maybe you like a certain area but can’t afford to buy a house there. You simply might not feel ready to tie yourself down or to own and maintain your own home. Renting a house makes life simple. You pay a certain amount every week or month, and every 12 months your lease ends, at which point you’ll usually – but not always – be given the option to renew it (though sometimes at a higher rate.)
The pros of renting
- Flexibility: You aren’t tied down to a specific property in a specific location. You aren’t locked into a mortgage. You can move as soon as your lease ends. You have far more flexibility than a homeowner.
- Stable expenses: During each leasing period you pay the same amount every month. This grants you the stability you need to budget effectively – there are no surprise property-related costs for renters.
- Less effort: If something goes wrong with the property, you call the property manager or landlord and get them to deal with it. Sure, you’ll need to keep the place tidy, but renting demands far less effort, particularly in terms of maintenance and upkeep, when compared to buying.
The cons of renting
- Less stability: While the lease provides stability for 12 months at a time, a renter doesn’t have much security beyond that period. The landlord can raise rent, sell the property, or otherwise kick you out at the end of your lease.
- You aren’t building equity: While ‘paying off someone else’s mortgage’ is an oversimplification, there’s still a kernel of truth there. You aren’t adding to your own wealth by paying rent to someone else.
- Less control: You can’t make significant changes to the property you rent. While you can decorate it in your style, for the most part you take it as it comes.
- Pet restrictions: Most rentals have a no-pet policy, which can be a real issue for people who have a furry friend, and a real disappointment for those who want one.
Buying a house
Home ownership is the dream of many, and for good reason – property is one of the safest investments you can make, you enjoy the stability of not having to renew a lease every 12 months, and there’s something intangible about having a place that you can truly call your own, and you can do whatever you want with. It’s important to temper your excitement though and go into a property purchase with open eyes. It’s an expensive affair in terms of both upfront and ongoing costs. You’ll need to put down a sizeable deposit, make monthly repayments that could rise with interest rates, and pay for all the associated costs of home ownership, such as property taxes, insurance, utility bills, renovations, repairs and general maintenance. It’s also important to recognise that a property is a fixed/non-liquid asset. It can’t be turned into cash quickly or easily. You may not be able to sell it when you want to, nor at the price you had hoped. The value of your home will be driven by the broader market, and while property prices tend to go up over time, there can be periods of years over which they can fall.
The pros of buying
- Stability: You don’t need to renew any lease, so you won’t be kicked out of your own home (provided you keep up with repayments!) As a homeowner you can safely look years into the future and build a stable and happy life.
- Equity: With every monthly mortgage payment you own a larger slice of your home, further building your equity. If you take a long-term view, property prices have always risen, so as long as you can maintain your mortgage repayments during the ups and downs of the market, you can reasonably expect your property to increase in value over time.
- Control: Do you want to install a pool in your backyard? Would you like to add another storey to your home? Perhaps you’d like to grow the world’s most majestic lawn? It’s your property, so you can do whatever you like with it (pending council approval.)
The cons of buying
- Added/variable expenses: Unlike renting, home ownership brings a broader array of expenses, many of which can vary from month to month, year to year. You need to be careful to borrow, buy and live within your means.
- Extra responsibility, time and effort: You’re in charge of maintenance and upkeep, and if there is an issue with your property it’s your responsibility to fix it.
- Entering the market: A property purchase demands serious financial leverage. Unless you are lucky enough to enjoy assistance from your family, you need to spend years saving for a deposit, and even then you’ll need a good credit history to be approved for a home loan.
- Risk: Over the course of decades property prices have trended up, but the value of your house can also fall over shorter periods. If you need to sell your home there’s no guarantee that you’ll get what you paid for it, and you’ll also face significant transaction costs.
Renting vs buying FAQs
Is it better to purchase or rent?
Is it better to buy or rent in New Zealand? The annoying truth is that there’s no single answer to the question of whether it’s better to rent or own a home. If you want flexibility, renting is probably better. If you want stability, and have the necessary funds, buying is probably better. Check out the pros and cons listed above to guide your decision.
What is the 5% rule (rent vs buy)?
The 5% rule is a simple calculation that helps you to compare the monthly costs of owning vs renting. It takes into account the added costs that come with ownership, then gives you a ‘rental breakeven point’. If you can find a similar rental at or below this breakeven point, the rule, represented by the following formula, states that it’s wiser to rent. [value of home] x 0.05 / 12 = rental breakeven point. Let’s say you’re wondering whether it’s best to buy or rent a two-bedroom home in a certain suburb, and you can buy a home for $500,000. Plugging that value into our formula, we get: $500,000 x 0.05 = $25,000 $25,000 / 12 = $2083 According to the 5% rule, if you can find a like-for-like rental at $2083 per month, you’re better off renting than buying the $500,000 home.
A caveat: the beauty of this calculation is in its simplicity, but that also means a lot of factors aren’t taken into account. It fails, for example, to consider potential capital gains and the ability to use available equity to purchase investments in order to realise and maximise wealth creation potential over the long-term.
Is renting cheaper than owning a home?
Whether renting is cheaper than owning an equivalent home depends on a wealth of factors, from property prices, to interest rates, to the competitiveness of the rental market. Often renting is seen to be cheaper than owning a home, at least in terms of the money that leaves your account every month, because renters don’t have to pay for things like property taxes, property management, home loan interest, insurance and upkeep. But if you consider the fact that your home loan repayments are building your equity, and that property tends to be a good investment, owning a home is usually the wiser financial decision.
Is owning a house worth it?
Buying your own property can be an incredibly proud and satisfying moment, as well as a wise financial move (generally speaking.) You’ll be given the opportunity to make that house a home and build a happy life in your local community. But as we mentioned above, home ownership isn’t all rainbows and unicorns: when compared to renting, more of your time and more of your salary will probably be devoted to your property. You’ll also take on the inherent risk that comes with making such a significant purchase. First home buyers should ask themselves a couple of key questions:
- How much can I afford/what is my borrowing capacity?
- Can I buy a house that I’d want to live in at that price?
If the answer to the second question is ‘no’, that doesn’t mean your property buying dreams are over. You could just change tack. Consider entering the market with an investment property that you can rent out, while you continue to rent yourself. If you’ve considered all the pros and cons, and have decided that owning a property is worth it, then you have your answer. But if you have read this entire article and still aren’t sure whether it’s best to rent or buy, that’s where our expert team of financial advisers comes in. Ready to find out which option is right for you? Sign up for a FREE discovery session today.