Monday, 8 April 2013

Should I rent or buy?

This is the second in a short series that I will be doing on moving out of home for the first time.  It will track the decisions I make, why I made them and the financial impact of them (as well as the social impact).  The first post in this series covered the question of 'Should I move out of home?'.

Having decided to move out of home the next decision becomes 'Should I rent or buy?'

There are several questions that you need to ask yourself when making this decision.  These questions should form the basis of your decision to rent or buy.  The questions include:

  1. Can you afford to buy a house / apartment in the area you want to live? 
  2. What stage of life are you at?
  3. Are you moving on your own or with someone else?

Can you afford to buy a house or apartment in the area you want to live?

For many people this decision is made for them - they are unable to afford a deposit or want to move out before they have saved for one.  However for others (myself included) the decision becomes one of relative finances - is it more cost effective to rent or buy and can I afford to and do I want to buy in the area which I want to live?

Obviously the first thing you need to decide is where you actually want to live.  Narrow it down to a suburb or region and then go online and look for houses in the area you are looking to buy in (or rent in).  Look at the relative costs of buying a house and how much it costs to rent in the area.   Then do the maths.  When you are buying it is a very different equation to when you are renting

  • Include the whole amount of the interest costs in your purchase calculation - there is no tax deduction when you are living in your own house (in Australia)
  • Work out how much you will be spending on outfitting the house - will you be happy sleeping in a sleeping bag until you can afford to buy a bed?
  • Work out how much it will cost to live in the house above what you are spending at home
    • Note you need to do this when renting as well so it is a calculation you should be doing anyway
On the other side of the coin you need to work out what the costs of renting are:
  • Do you want to live on your own (much more expensive) or are you happy having a house mate?
  • How much is rent and other bills likely to cost you each month
  • If you are young and not very experienced at living on your own add an additional amount for eating out when you can't be bothered cooking - trust me it adds up
In Australia it is almost always cheaper to rent than to buy when comparing similar places however there are the benefits of home ownership such as piece of mind and the requirement to use that extra cash to pay down your debt as opposed to blowing it when you have it sitting around that cannot be quantified in an equation like this.

Because I already have an investment property, the desire get into the property market was not present.  The relative attractiveness of renting therefore was increased dramatically even though I was raised in a family where rent money was seen as dead money.  This is true if you're living at home however if you move out of home you need to remember that interest on your loan is dead money too!

What stage of life are you at?

If you are at the stage of life where you are looking to 'settle' somewhere and raise a family or start a family or perhaps you know exactly where you want to be and what you are happy with then buying is the option for you.  Buying a house or apartment really only makes sense if you are willing to commit to the place for a reasonably long amount of time (i.e. 5 - 10 years).  Otherwise the transaction costs involved simply do not make it worthwhile and you are likely to lose a fair amount of money.

On the other hand if you are at an 'intermediate' stage of life and are looking for experiences that come with being a certain age (i..e in your mid to late 20s and looking to live in the city and experience the night life) then you possibly are not looking for the place you are going to spend the next 10 years of your life.  We all know that this stage of life doesn't last very long but we want to experience it anyway.  This is currently the stage I am in - I wanted to move out of home and experience the 'bachelor lifestyle' before eventually settling down.  I don't want to live in an apartment for the next 10 years but I'll certainly be happy to do it for the next 2 - 3.  Once again renting seems to be winning out for me.

Are you moving out on your own or with someone else?

This is an important question because you need to think about your relationship with that person carefully.  Do not buy a place with a person you cannot see yourself with for the rest of your life.  Breakups and divorces are hard and making smart financial decisions is not at the top of the agenda in these circumstances. Could you afford your mortgage repayments and other bills if you were suddenly on your own.

On the other hand if you have been seeing the person for a very long period of time and have a cast iron commitment with them (such that you are completely sure that you are going to be with them 10 years from now) or are engaged or married then perhaps buying a place you can settle down in may be the smarter idea.

This was not an issue for me however I did think about moving out with my last girlfriend - it never got to the stage where we really discussed it however going through the mental exercise if we had moved in together when her last lease was up we would have been in the new place for just over a month before breaking up (presumably with 11 months on a lease to go).  The thought makes me realise how sure you need to be of a relationship before you move in together!

What did I end up doing?

I ended up deciding to rent.  The opportunity fell into my lap - a friend of mine bought a place in a really nice area and he was looking for a house mate to help him pay his mortgage.  

I know exactly the type of person he is (I've known him for years) and he knows what I am like.  I hated the idea of moving in with random people and a lot of my friends are getting married and buying their own homes so I was very lucky when this opportunity arose.  

This decision has allowed me to put off the decision about where I want to buy my own place however I am still saving so that I have a sufficient deposit when I do decide to settle down.

I'd love to hear your stories on whether you decided to rent or buy and what things you thought about so please post them below.

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  1. Hi 90 million blogger,

    Just stumbled upon your blog and I’ve especially enjoyed reading the Investment Banking section from an Australian perspective. It’s refreshing to see some insight on the profession from someone who isn’t in the US and doesn’t work on Wall Street, as much of their advice is hard to apply to the circumstances in Australia.

    For quite a while, I’ve been fairly confident investment banking is the career I want to pursue, even after reading your “Worst day as an Investment Banking analyst” post! I’m wondering if you could give any advice on choosing a major? You mentioned much of the basic knowledge needed is accounting related, however I was under the assumption a double major in Finance and Economics (from University of Melbourne) would be more suitable. Do you think a double major in Accounting and Finance would be a better fit?

    Furthermore how many opportunities are there for an employee of a multinational investment banking firm, such as Goldman Sachs, to relocate overseas to the UK or US? Is that a realistic expectation at all?

    Also from a glimpse through some other posts you seem like an avid traveller, can an investment banker expect the same amount of vacation time or is it all work and no play?

    1. Hi Cecilia,

      Thanks for you comments and questions. I'll deal with your questions in order:

      For your second major (other than finance), accounting will probably be more useful than economics (the amount of time you spend reading notes to the Annual Reports is amazing) however you will not be disadvantaged in terms of getting into banking if you choose Economics. My second major was actually economics because I found it particularly interesting.

      The opportunity to transfer internally to the US or UK depends both on the firm and on the stage in the business cycle. At the moment it is very easy to transfer internally to the US. I have several friends who have done so in the last 2 months. This is because the Australian market has slowed (so there is not as much work here) and the US market is really starting to pick up. When the overseas markets are slow or the Australian one is busy it takes much longer to transfer however it is always possible. They normally make you wait 2 years before they send you though.

      It is actually a lot easier to take leave in investment banking than I would have thought. However taking breaks longer than 2 weeks normally get a bit of push back. Most people that I knew used to take 2 weeks for their overseas holiday, 1 week over Christmas (not compulsory) and bank 1 week. Getting your leave cancelled was always a risk though they really tried not to do it and I only saw it happen a few times.

      If you have any more questions I'd be happy to answer them (although if you could do it on one of the Investment Banking posts that would be great as others may also be wondering the same thing)!

  2. Any ideas on websites that finding share apartments or flatmates? I know that there is flatmate finder however weighing up if I move in with friends or people who I don't know (a decision that has both pros and cons).
    I'm looking to rent and buy an investment property though, this to me makes the most sense while I am young with minimal financial commitments.

    1. Hi JM,

      I've heard gumtree is pretty good for finding flatmates. I went with someone I know but (as I'm sure you know) that has upsides as well as downsides.

      Agreed the rent while you buy an investment property makes financial sense. You get the most benefit if you also invest the money you save by renting over buying when moving out.