- Posted 06 May
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There are many factors to consider when making a decision around choosing to rent a home rather than buying, and vice versa.
There is no right or wrong answer either. In some instances, renting is the better option and in others, buying would benefit you better.
To help you make that decision though, check out the renting vs buying points below. Consider each one carefully and at the end of this post, you should be much closer to determining which option best suits your current situation.
5 Points to Consider – Renting vs Buying
1. Time – how long are you planning to stay in the house? If you have no plans to move within a 5-year timeframe, then generally, buying the house would be better than renting. The reason for this is that short-term, renting is the better option, as the costs associated with owning a home out weight the benefits in the first few years. The longer you plan to stay in a home or hold on to the asset, the better it is to buy.
2. Income – how stable is your income? If your income fluctuates, renting is a better option because it’s much easier to change your living situation in relation to how much you can afford. If you have a mortgage, there is not a lot you can do to change the amount you’re paying, short of selling your home.
3. Amount you Earn – you shouldn’t be spending more than a third of your income on housing-related costs. This includes mortgage payments, taxes, insurance and other housing-related expenses – you need to be able to have a bit of a buffer should things change unexpectedly. Consider this before buying a home
4. Price to Rent ratio – this is where you work out the price of the house divided by the annual rent.So if a house you were looking at buying was $500,000 and a rental property in the same area was renting at $500 per week, the annual rent would be $26,000. The calculation would look like this:$500,000/$26,000 = 19.
This means that the price of the house is 19 times the annual rent that the home would earn. The higher the ratio, the more renting is a better option, with anything falling between 15-20 times making renting the more attractive option. Another way to look at this for more of an overall, in depth picture, would be to find out the price to rent in the region you’re looking at.
Compare that with the average price to rent over a period of time, such as 20 years and compare that with the current price to rent ratio. It will provide a good way to measure if that price to rent ratio is accurate.
5. Quality and Research – markets vary from time to time in the type of houses being offered. Sometimes the quality available is not that great, renting then becomes a viable option.It also comes down the neighbourhood your looking at and what infrastructure is in place. You want to know what the overall economic health is of the neighbourhood so you can see just what you’re walking into. Research is key to making sure that if you are going to buy, you’re in an area that is flourishing.
In the end, you need to run the numbers and determine what your long term plans and goals are.
If you’d like to discuss this further or talk about running your own numbers, call us today on 1300 735 868.