Key Post "Is it cheaper to rent or buy?"

Brendan Burgess

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Fiona Reddan has an interesting article in the Irish Times

The great property dilemma: Is is cheaper to rent or buy?
Buying a house may be akin in many ways to renting from the bank...
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This is a key point which I have often made, which most people don't get.


When you borrow money to buy a house, you are effectively renting money. It's probably much cheaper to rent money than to rent a house.


Unfortunately, as with most commentators, Fiona doesn't really understand the time value of money " the Spencer Dock apartment is really going to cost you €405,632 when you’ve factored in how much the bank will take in interest from you – a staggering €189,632 over 30 years"



The calculations are much easier and much simpler. Using her example

Rent of two bed apartment in Spencer Dock : €1,650

Cost of two bed apartment: €215,000
Monthly mortgage interest at 4.5% = € €800 (€ 9,675 per annum)

So renting the money to buy the apartment is about half the cost of renting the apartment. ( This calculation will be different for other types of houses and other parts of the country)

While interest rates are expected to rise in the medium term, they would have to rise to 9% to make renting the same price as buying with a mortgage.


Buying a house with a mortgage may be akin in many ways to renting from the bank, but with one major difference: at the end of those 30 years or so it’s yours.
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This is a bit simplistic.

A mortgage holder makes capital repayments - that is simply a form of saving. There is nothing to stop the renter from saving their money and ending up with a pot of money in 30 years time with which they could buy a house.
 
I take issue with the example she used, the apartment in Spencer Dock. Personally, and I expect this would not be an unusual view, I would deem anyone paying €1650 for a two bed apartment in that part of Dublin to be easily parted from their money, shall we say. I am not saying there are not people doing this, or that you won't go on to Daft and find them asking this rent, merely that even with rising rents that seems profligate for a couple.

Alongside that, you'd have to ask are the type of people happy to pay those rents willing to actually buy the same dwelling? For the most part I don't think they are. Couples in their late 20s and older are thinking of buying a house more than likely in the suburbs, not a two bed apartment in the docks.

That brings us to the chief advantage of renting - flexibility. Hard to monetize this, but it is a major plus point for anyone who feels they may wish to move, emigrate etc. Of course flexibility can work against you too, ask anyone whose landlord has sold.

If you gave me a rent of €1650 and told me to find a place to live in Dublin I would get a better deal than a two bed apartment in Spencer Dock, that I would guarantee. I'd get a nice house in a good suburb, a house that would cost far more than the apartment in Spencer Dock to buy (incidentally it seems the online version of the article has lost something, and doesn't quote the actual purchase price of the apartment? It appears to be based off a mortgage of 220k,so presumably a purchase price of 240k or so)

Show me a house in a suburb that could achieve €1650 in rent and yet only cost €240k. There aren't any.

I don't know if my own personal circumstances are representative, as I think I have got a good deal (but then my landlord also has a good tenant which I think they appreciate). There are incentives you can use to your benefit to leverage lower rent (longer leases, pay quarterly in advance etc)

I pay rent of €1100 pcm for a 3 bed semi, but I'd guess the house would probably sell for €300k in today's market. Who knows, Dublin prices have gone so crazy, maybe more.

In short, using a rental with a yield of 8.25% or so for a rent vs buy comparison puts something of a skew on things, particularly in light of its questionable attractiveness long-term.
 
HI bugler

OK, so let's look at your examle so

Monthly rent of house : €1,100

Rent of money to buy house: €1,125 (€300k @4.5% /12)

So around the same costs.

I suspect that for more expensive family homes, it becomes cheaper to rent the house than to rent the money to buy the house.

Brendan
 
What about management fee's, property tax and water charges? Guesstimate of €150/200 a month on top of your mortgage?
 
Should the decision also take into account, sustainability of tenure, ability to paint/renovate the rented property to ones own taste! Also if an apartment is viewed simply as a temporary accomodation, it may be more practical to pay what appears to be a higher rent for a relatively short period with the ultimate goal being to purchase a suitable and long term sustainable house. I.e. in the example given, it may well be cheaper to buy if the decision was that the apartment in question is designated as permanent rather than temporary accomodation.
 
This is an interesting question and, in my opinion, should be read in conjunction with the "Is profitable property possible at the moment?" thread:

http://www.askaboutmoney.com/showthread.php?t=184415&page=2

I know that most people aren't interested in property investment but there's a simple truth in the fact that, if property investment is profitable, then it is significantly cheaper to buy than it is to rent.

The thought process behind this is that the calculations into owning do not need to take into consideration voids, PRTB registration, tax, USC, PRSI, advertising and other expenses associated with being a landlord. It also results in reductions in other types of expenditure, such as house insurance.
 

You are most likely right on getting a house in suburbs for less, but not all adults in late 20s/early 30s want to live the 'burbs. I dread the day I would be living in, say, a "good" estate in Dundrum suburbs - you need to factor in the handiness of places. Currently I rent in Portobello and am happier to pay higher rent that father out into D6 area, as im closer to work, town etc, since I do not want to be getting any form of public transport to work.

Its hard to nail down whats good value, as all people have different values.
 
Using the figures in post # 31 in "Is profitable property possible at the moment?", the figures, from which cremeegg correctly identifies that the return is not worth the hassle for an investment, the following are re-jigged in terms of analysing buying v' renting:

Property Cost|95000
Deposit|9500
Acquisition & Furnishing Costs|5000
Savings Needed|14500
Mortgage Needed|85500

RENTING |
Cost to Rent - 675 per month|8100

BUYING |
Property Ins|350
Property Tax|90
Mortgage Interest - 4.5%|3848
Lost Interest on Savings - 2%|290
Maintenance|950
Total Cost of Ownership|5528

Of course, you'd have a capital repayment mortgage but, as Brendan states above, this can be considered a form of saving.

Regarding things like Water Charges, they will be passed onto the tenant, either directly or indirectly. Therefore, they'd increase the cost of both owning and renting equally.

A lot of people also refer to the fact that the higher end properties are cheaper to rent than to buy. I can verify that this also holds true locally.

However, one has to question whether they'd actually rent such a property. Most people I know prefer to rent a cheaper property whilst saving to buy the more expensive property.

If this is the intended strategy, one should estimate how long they'd be renting the cheaper place before being able to afford the better place. If this amounts to 5+ years, then some numbers should be crunched because it may be cheaper to buy with the intention of reselling or renting the property out in 5 years time.
 
You may be renting from the bank but effectively once you buy a house, you have proper security of tenure.

Take for example the difference between two example people. Person 1 buys a house using a mortgage from the bank. Person 2 is renting.
After a while, they both stop paying.

Who do you think is still living where they were when they stopped paying, say after 6 months, and who do you think was turfed out on the street?
 
Ronaldo

That is a great piece of analysis - and clearly laid out.

Would you have the information and time, to do it for a few different scenarios?

Most people I know prefer to rent a cheaper property whilst saving to buy the more expensive property.
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I had never thought of it this way, but it's a very interesting point. Oddly enough, they should be doing the opposite. It's cheaper to buy an apartment than to rent it, while it appears to be cheaper to rent a family home.
 
Brendan Burgess said:
Would you have the information and time, to do it for a few different scenarios?
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I don't have the information for many scenarios and don't know areas around Dublin but had a look to see if I could provide for a comparable house for rent and to buy.

For Sale: http://www.daft.ie/searchsale.daft?id=928134
To Rent: http://www.daft.ie/searchrental.daft?id=1420653

Now, I don't even know Firhouse or any other Dublin areas but here are the potential figures:


Property Cost|249950
Deposit|24995
Acquisition & Furnishing Costs|7500
Savings Needed|32495
Mortgage Needed|224955

RENTING |
Cost to Rent - 1250 per month|15000

BUYING |
Property Ins|500
Property Tax|404
Mortgage Interest - 4.5%|10123
Lost Interest on Savings - 2%|650
Maintenance|2500
Total Cost of Ownership|14176

I generally operate on a maintenance=1% of property value basis which should prove ample.

Brendan Burgess said:
I had never thought of it this way, but it's a very interesting point. Oddly enough, they should be doing the opposite. It's cheaper to buy an apartment than to rent it, while it appears to be cheaper to rent a family home.
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Yeah, it's all to do with the Irish mentality of wanting to own. It may be cheaper to rent the more exclusive properties but people generally have a long term goal of owning and, by renting somewhere cheaper, they'll get to buy the better property faster.

It seems to be common sense that, if renting is cheaper, you'll save money by renting and get to live in your dream house sooner. The problem is, people don't seem to think in such a rational manner.
 

The big issue ignored in your figures is that they are just for the first year. After that on average the rent will increase by the rate of inflation yet as the mortgage is repaid the interest due goes down
 
The focus of this discussion seems to be on just the buying cost, but once you've bought a house you spend more on it than you would on a rented property. Repainting, greenhouses, not things that necessarily add to resale value of your investment. Perhaps it makes one feel more comfortable, but it is spending which would not be laid out if you didn't "own" the house.
 
OMD said:
The big issue ignored in your figures is that they are just for the first year. After that on average the rent will increase by the rate of inflation yet as the mortgage is repaid the interest due goes down
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I was just having a conversation with someone tonight who has 9 years left on a 25 year mortgage. He pays €500 pm on a house, two doors away from the exact same house that is renting for €1300. In 9 years he wont be paying his mortgage. How much will the rent be two doors away at that time.

And I remember many years ago talking to my cousin when I was renting a tiny flat for £60 per week, he was into the last 5 years of his mortgage on a 3 bed house and was paying £25 per week. He is still living in that house today, over 20 years after the house was paid off.
 
Brendan Burgess said:
A mortgage holder makes capital repayments - that is simply a form of saving. There is nothing to stop the renter from saving their money and ending up with a pot of money in 30 years time with which they could buy a house.
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Doesn't assume that house prices and rent will stay static for the next 30 years ?
 


But surely the additional spending gives you a better standard of living than a renter. You can't use the fact that you'd put a greenhouse in the back garden as a reason to justify renting being cheaper over buying.

Surely, if you decide to put a greenhouse in your back garden, you'd have to justify it on it's own basis. Try asking a landlord to add a greenhouse to your rental property and you'll see why, if anything, the desire to have a greenhouse justifies buying over renting as opposed to your idea of the opposite.

Repainting is something that would be included in my "1% of value of property" for maintenance.
 
OMD said:
The big issue ignored in your figures is that they are just for the first year. After that on average the rent will increase by the rate of inflation yet as the mortgage is repaid the interest due goes down
Click to expand...

My figures are based on an interest-only mortgage but most people will have a repayment mortgage and, therefore, your idea of the reduction in house costs over the years would be correct.

However, one has to consider that, when comparing renting to the cost of an interest only mortgage, you cannot factor in the reduction in interest over the years because it would not be a like-for-like comparison.

I prefer to think of the reduction in interest as a return on the investment made in my mortgage through capital repayments - much like a renter who opts to invest in a basket of shares might receive dividends which could be used to subsidise their rental payments.

Most of the figures quoted above for costs of ownership are figures that are just as likely to rise as they are to reduce.
 
OMD said:
The big issue ignored in your figures is that they are just for the first year. After that on average the rent will increase by the rate of inflation yet as the mortgage is repaid the interest due goes down
Click to expand...

And towards the end of your mortgage there is no mortgage rental cost as it's mostly capital being paid back.
 
ronaldo said:
Repainting is something that would be included in my "1% of value of property" for maintenance.
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I like the 1% idea.

As for repainting I should have shares in Dulex at this stage, my rentals are painted way more frequently than the house I live in.

Have we come to a conclusion on whether buying or renting is better?

Honestly, paying 1650 rent for an ordinary apartment in Dublin is crazy for two people. I'd prefer to live in a hovel, while young and childless in order to save for a property and so would most people. Also find it hard to believe that one cannot buy a run down property in Dublin, in perhaps not the best areas, but one that is solid and needs work but is habitable, and that is what I'd be purchasing in Dublin if I had to live there.
 
Case study:
My family were living in our 3-bed semi in Knocklyon. We were in negative equity by approx. 70k and were unlikely to get a mortgage 3 years ago but for quality of life etc we wanted to move further into town (Terenure) and into a bigger house.
So back in 2011 we moved into a rented corporate-let type house in Terenure and rented out our PPR. The net rental difference was quite affordable for us and it was a great move for the family. After about 18 months we moved to another rented house in the area and made the decision we would try to move permanently.
Sold the house in Knocklyon last year (the negative equity was just 20k at that stage).
The idea of renting long-term though in Terenure was frightening - we can see even since we signed out lease last year, rentals have risen significantly.
We have been very fortunate in that the house we were renting was going to be put up for sale and we were able to do a deal with landlord before it went on the market. The sale is now closing.
To put some perspective on things:
Our rental
  • lease on house that we're now buying was 2300 per month
  • Our mortgage (BOI over 30 years is approx. 2800 per month capital and interest)
  • An identical house on the same road has just gone up for rent @ 3850

So the message is that short-term renting can be a great option an alternative to selling and buying. Particularly if you are changing location, as you get to know the area etc. But long term, security of tenure and broad security of outgoings are extremely important to most people (particularly families) and so even if in the short term the numbers above might favour renting, the premium paid for owning is reflective of the price people will pay for certainty (c.f. the premium you will pay for a fixed-price mortgage versus variable)
 
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