Author Topic: Cheap rental vs getting on the over-priced property market  (Read 9685 times)

Mike the Kiwi

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Cheap rental vs getting on the over-priced property market
« on: March 17, 2016, 06:04:54 PM »
Hi have a personal dilemma that I need help with - do I stay in a cheaply priced rental or sell my soul to the bank to get a mortgage?

I am a 35 year old married father with one kid (a 21 month old boy) and we live in New Zealand's capital city, Wellington. For the last five years we have been renting an awesome two bedroom house on a quiet street that is surrounded by native forest and native bird life. The rent we pay is cheap for the area (about $400 per week) and it only takes me 30 minutes walk to work (downhill, through a native bush area and with a great view of the ocean). The area we live in is considered pretty flash but we have struck a great relationship with the landlord where he allows us to pay below market rent as long as I look after his property. Furthermore, he said to me that it would be another 10 years before he wants to sell the property, meaning that we have some security of tenure.

The suburb where we rent is also a perfect place to raise a child. There are multiple bush walks within 5 minutes of our home and a great park nearby where my son can play. The cheap rent also allows us to save quite well. Collectively we bring in about $130,000 annually.

However...

Interest rates are now at an historic low in NZ, meaning that it is cheaper than ever to have a mortgage. Some banks are offering rates at low as 3.95% for a two year term, while it is also possible to get a fixed rate term of about 5% over 10 years. This is absolutely crazy and it means that borrowing has never been so cheap in New Zealand.

As a consequence of cheap interest rates, the residential property market in Wellington is BOOMING. Some houses are going for $100,000 over their rateable value (admittedly in the more expensive suburbs). Even properties in the historically cheaper suburbs are selling for crazy prices because buyer demand is so high. Making things worse, the Wellington market has become flooded by investors looking for good deals. First home buyers like myself are just not getting a look in. And in cases where first home buyers are getting on the property ladder, they are doing so by getting into horrendous debt. Even then, these are still typically properties that are far from the central business district, meaning a long commute time.

My question is simply this: is it wiser to remain in the house that I rent, or should I jump on the housing bandwagon? The difference being that if I remain renting, I will have a great lifestyle but no assets; but if I buy I will have an asset (which is likely to appreciate in market value) but I will be dirt broke,  and will probably have to commute long distances every day.

Thoughts?

Thanks
Mike the Kiwi

 

Felicity

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Re: Cheap rental vs getting on the over-priced property market
« Reply #1 on: March 17, 2016, 06:46:28 PM »
Mike, you know the answer - you just want validation. ;)

Keep renting and be happy.

If you really want to justify your choice with numbers, use something like http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0. That might need to be fiddled with more than usual to adjust for NZ rates, taxes, etc, but the calculations will remain the same.

clarkfan1979

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Re: Cheap rental vs getting on the over-priced property market
« Reply #2 on: March 18, 2016, 02:18:24 AM »
If the local real estate market is "Booming" that would be a sign for me to rent.

nnls

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Re: Cheap rental vs getting on the over-priced property market
« Reply #3 on: March 18, 2016, 02:42:16 AM »
If you wanted to get into the property market could you buy an investment property? Then you can keep renting in the suburb you love and buy an investment in another area.

Assuming that money wise it works out ok?

pbkmaine

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Re: Cheap rental vs getting on the over-priced property market
« Reply #4 on: March 18, 2016, 02:56:50 AM »
Keep renting.

Dee18

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Re: Cheap rental vs getting on the over-priced property market
« Reply #5 on: March 18, 2016, 06:55:06 AM »
I had a great rental situation that I gave up to buy a house.....I wish I had kept renting!  Even though I had owned a home previously I underestimated how much more work having the house would be.  Enjoy your situation fir the next 10 years!

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #6 on: March 18, 2016, 12:56:18 PM »
Although continuing to rent seems the most logical option at first, my decision is complicated somewhat by my wish to have an asset that my son can inherit. This is not something I can do if I continue renting.

I feel that I would be selling him short if there isn't something I can pass on to him one day.

Felicity

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Re: Cheap rental vs getting on the over-priced property market
« Reply #7 on: March 18, 2016, 01:12:38 PM »
Although continuing to rent seems the most logical option at first, my decision is complicated somewhat by my wish to have an asset that my son can inherit. This is not something I can do if I continue renting.

I feel that I would be selling him short if there isn't something I can pass on to him one day.

You might want to think more about why an inheritance is important to you - is it to give him a step up in life? That could easily be accomplished with a cash inheritance. Is it to have something he can remember you with? What about something else, say a watch or something?

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #8 on: March 18, 2016, 01:48:44 PM »
Good questions. Quite simply, my wish is to give my son a step up in life and the opportunity not to be saddled with debt. I would love my boy to have the freedom that comes with being debt free so he could live a MMM-type lifestyle.

The point is whether having a house to pass on to him will help achieve this goal. To begin, I certainly think it's better than a cash inheritance given that money in the bank can lose its worth compared to the value of a house.

But I guess the second point is that if I live in my house until I am old and infirm, my son might not get the capital benefit of the house until later on in his life anyhow. I'm not yet sure how to address this problem.

Jack

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Re: Cheap rental vs getting on the over-priced property market
« Reply #9 on: March 18, 2016, 02:04:04 PM »
Good questions. Quite simply, my wish is to give my son a step up in life and the opportunity not to be saddled with debt. I would love my boy to have the freedom that comes with being debt free so he could live a MMM-type lifestyle.

The point is whether having a house to pass on to him will help achieve this goal. To begin, I certainly think it's better than a cash inheritance given that money in the bank can lose its worth compared to the value of a house.

But I guess the second point is that if I live in my house until I am old and infirm, my son might not get the capital benefit of the house until later on in his life anyhow. I'm not yet sure how to address this problem.

I'd say cash (or more to the point, some other paper asset like a stock or bond portfolio) gives him more "freedom" than real estate would. After all, if he wanted to move somewhere other than Wellington he couldn't exactly take the house with him!

randymarsh

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Re: Cheap rental vs getting on the over-priced property market
« Reply #10 on: March 18, 2016, 02:36:13 PM »
The difference being that if I remain renting, I will have a great lifestyle but no assets; but if I buy I will have an asset (which is likely to appreciate in market value) but I will be dirt broke,  and will probably have to commute long distances every day.

If you wouldn't have any assets without a house, then you're doing it wrong. I rent but I have assets of around 20K in cash and retirement accounts. Your gross income is $10,833 per month, while rent is only $1,600. Spending 15% of your gross income on rent is a steal.

Realtors and lenders love to quote the statistic that the average homeowner has 5X the net worth of renters, but all that shows is people's refusal to save money unless they're forced to with monthly mortgage payments. There's nothing stopping a renter from amassing huge sums of money. I'll take renting and having 200K in investments and cash over having a 200K mortgage on a 400K house and no other assets every day of the week.

Being dirt broke and commuting long distances is a non-starter for me. One would be bad enough, but 2 is insane.

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #11 on: March 19, 2016, 12:17:18 AM »
Yes, but would you want to be renting and have 200k of investments but without the security of home ownership when you get older?

I'm pretty sure that as most people get older they will feel more insecure without a permanent place to call home. Isn't the hardship associated with home ownership when you are younger worth the future benefit for when you are older, not to mention something that you can pass to your kids?

 

Shane

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Re: Cheap rental vs getting on the over-priced property market
« Reply #12 on: March 19, 2016, 01:13:33 AM »
Yes, but would you want to be renting and have 200k of investments but without the security of home ownership when you get older?

I'm pretty sure that as most people get older they will feel more insecure without a permanent place to call home. Isn't the hardship associated with home ownership when you are younger worth the future benefit for when you are older, not to mention something that you can pass to your kids?

No, do not enslave yourself to the bank to buy an overpriced house!

Home ownership will NOT provide you with the security you're looking for. Keep renting and pump as much money as you can into your investments. A big investment portfolio will give you much more security and flexibility than a house when you're older. It'll give you the ability to live anywhere and do anything you want to in your old age, and you'll easily be able to pass on some of that money to your son while you're still alive so you can see how it helps him.

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #13 on: March 19, 2016, 02:08:02 AM »
But Shane taking the renting/investing path presumes that I can save at a rate at the same as or greater than house price inflation. And that is not certain given the New Zealand housing market.

Even if I build an investment portfolio, later on in life house price inflation may mean that I have to spend every penny on a house for a settled retirement, or possibly more. Then I would be back to being broke.

Additional problems may also occur when my son gets older. Suppose that he is settled into a school but then suddenly we are forced to move areas because our landlord sells the house. In this case, I may have to resettle him into a new school, or he may have to commute a long distance to remain at the same school.

You see, even the option to stay renting comes with possible heavy costs. Although I don't want to be a slave to the bank, the decision isn't black or white.

Shane

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Re: Cheap rental vs getting on the over-priced property market
« Reply #14 on: March 19, 2016, 03:07:24 AM »
Have you ever owned a house? Home owners incur significant expense in both time and money to maintain their homes. Are you prepared to do the work necessary to keep your house in good condition? Do you enjoy spending all of your free time working on your house? Do you like cutting grass, weedeating, painting, repainting, fixing things that break? If so, then maybe you'll enjoy homeownership.

I don't get the idea that you want to own a home in retirement because it'll make you feel safer. I quit working last year, and we're selling our home this year so that we can retire without having to constantly worry about and work to maintain our house. I feel much safer knowing that, at any time, my family and I can just pick up and move to wherever in the world we want. If there's a big earthquake or hurricane or tsunami and your house gets demolished, what are you going to do then? If you're renting, you can just go someplace else. No worries.

Renting is much safer financially than buying a home. If you own a home, you never know when a huge expense will come up and you may not have the cash to pay for it. So, you may have to go further into debt to pay to fix something. As an example, in the last year, all of the major appliances in our house failed and had to be replaced! This was not something we were expecting to have to pay for, but one after the other, our appliances quit working, and it would've cost us more to fix them than to just buy new ones. We bought a new washing machine for $900, a new range for $700, a new microwave for $300 and a new refrigerator/freezer for $1300. Two years ago we had to upgrade the electrical system on our house, and it cost us $3097. A month later our solar hot water tank suddenly started to leak, and we had to have it replaced at a cost of $1600. Things like this come up all the time when you own a home, and you have to be ready to pay for them. If you're a renter, all you have to do is call the landlord and wait for him to send somebody to fix it. If your landlord doesn't fix whatever breaks in a timely manner, you're always free to move out and go live somewhere else. You're free

Have you read Jim Collins' piece on owning a home? Try reading that first and then get back to us and let us know if you still want to buy a house...   :)

WerKater

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Re: Cheap rental vs getting on the over-priced property market
« Reply #15 on: March 19, 2016, 03:39:33 AM »
I am seconding everyone:
Keep renting.
It does not make sense to give up what you yourself call a good deal (current renting situation) for a bad deal (buying in an overpriced market) just because your crystall ball is telling you prices will continue to rise quickly.

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #16 on: March 19, 2016, 04:31:05 AM »
To Shane, that's a strong point. Admittedly, I haven't owned a home before and I find the prospect of spending all my time and money repairing things as they go wrong quite terrifying. Truthfully, my budget would only get me a shitty run-down house anyhow. So on top of working full time until retirement to pay off my shitty house, my spare time and money would be spent continually fixing things. I would probably become a tired, broke, stressed and disengaged dad in this scenario.

Nevertheless, I have never, ever met one person who owns a home freehold who has said that they regret that they ever bought it and they wish that they remained renting their whole life. Do you, Shane, regret that you bought your house? If you could start again, would you choose not to?

WerKater

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Re: Cheap rental vs getting on the over-priced property market
« Reply #17 on: March 19, 2016, 05:07:15 AM »
Nevertheless, I have never, ever met one person who owns a home freehold who has said that they regret that they ever bought it and they wish that they remained renting their whole life. Do you, Shane, regret that you bought your house? If you could start again, would you choose not to?
I can't speak to your specific question to Shane, but there is a tendency in humans not to admit to themselves that they made mistakes, especially where major life decisions (such as buying a house) are concerned. From some non-scientific personal observation I believe (and this is admittedly speculation) that there are quite a few people who bought houses in hot markets and who would have been much happier if they had kept renting. But they
- either never really thought through that their house (or rather: their mortgage) is the root cause of their unhappiness by chaining them to a city or a job.
- or they did think it through but are not willing to admit it to themselves or others.

Many people also seem to consider crushing debt a relatively normal thing. Hence, they won't express unhappiness with a crappy mortgage situation because they simply see this as the way the world works. It would be like being unhappy that humans can't fly or breathe under water.

Shane

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Re: Cheap rental vs getting on the over-priced property market
« Reply #18 on: March 19, 2016, 12:25:33 PM »
Nevertheless, I have never, ever met one person who owns a home freehold who has said that they regret that they ever bought it and they wish that they remained renting their whole life. Do you, Shane, regret that you bought your house? If you could start again, would you choose not to?
I can't speak to your specific question to Shane, but there is a tendency in humans not to admit to themselves that they made mistakes, especially where major life decisions (such as buying a house) are concerned. From some non-scientific personal observation I believe (and this is admittedly speculation) that there are quite a few people who bought houses in hot markets and who would have been much happier if they had kept renting. But they
- either never really thought through that their house (or rather: their mortgage) is the root cause of their unhappiness by chaining them to a city or a job.
- or they did think it through but are not willing to admit it to themselves or others.

Many people also seem to consider crushing debt a relatively normal thing. Hence, they won't express unhappiness with a crappy mortgage situation because they simply see this as the way the world works. It would be like being unhappy that humans can't fly or breathe under water.

WerKater's right. Most people will rationalize all the bad stuff that comes with homeownership away and never admit they made a mistake. It's human nature.

Personally, I don't regret that my wife and I bought our place, but our situation is not at all the norm. We've never had a mortgage. In 1997 we paid $90K cash for a piece of raw land in the country. For a few years we continued renting an apartment while we saved more money to build a house. In 2001 we moved into the 1/2 finished 1 bedroom/1bathroom house. Over the years, as our family has grown, we've slowly added on to our house so that now we've got 3 bedrooms and 3 bathrooms in the main house and a guest house that we've rented out to the same good tenant since 2007. In addition to the houses, we've also built several farm structures on the property, as well as fences, gardens, orchard, etc. So, in our case, we never had the stress of having a mortgage, but we've traded pretty much all of our free time and money for that privilege.

Financially, we would be better off today and would've been FI several years earlier if we had just continued renting our inexpensive apartment in town and instead dumped all of our money into an S&P500 index fund. Right now, our place is for sale for $649K. If we get close to full price, after realtor's commissions we'll net ~$600K. Instead of buying and developing our land, if we had just continued renting and invested the surplus money in VFINX, today we'd have ~$716K, or over $100K more than our home is worth, and we wouldn't have had to spend thousands and thousands and thousands of hours of our time and energy to build it.

Having said that, homeownership isn't only about dollars and cents and the bottom line. If you get significant satisfaction from caring for your home and improving it, then that's something that's not necessarily quantifiable in money terms. If, on the other hand, you'd rather spend all of your free time playing with your son and hanging out with your family and friends doing fun stuff like going to the beach or reading books or sleeping, then don't buy a house. It'll suck up all of your time and energy and you won't have as much left over to enjoy yourself when you're not at work.

That's one of the main reasons my wife and I decided to sell our house this year. We both find that when we're home we're constantly thinking about all of the things that need to be done around the house, and it makes it harder for us to enjoy ourselves and be fully "there" in the moment with our 7 year old daughter. We're looking forward to moving back into a small, inexpensive apartment, that's easy to keep clean, and where we don't have to even think for a moment about a list of projects that we have hanging over our heads. If something breaks, we'll just call the landlord as we're headed off to the beach to go play.

randymarsh

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Re: Cheap rental vs getting on the over-priced property market
« Reply #19 on: March 19, 2016, 04:59:24 PM »
Yes, but would you want to be renting and have 200k of investments but without the security of home ownership when you get older?

I'm pretty sure that as most people get older they will feel more insecure without a permanent place to call home. Isn't the hardship associated with home ownership when you are younger worth the future benefit for when you are older, not to mention something that you can pass to your kids?

Eventually, I probably will buy a house or a condo. But not if it's going to stretch me financially!

Buying a house to live in should not be a hardship. If it is, that's a sign you're spending too much!

If you were asking if you should buy a rental property (that you could afford) and put in sweat equity, that would be a situation where a temporary "hardship" is worth it in the future. Spending every dime you have just so you're a homeowner is not the same thing.

I don't understand the fascination with wanting to leave your kid a house. If we assume you die at 80, your kid is going to be 45. I would hope by that point they already have a solid living arrangement and are financially secure without your help. If they don't want to live in the house, you've now given them the burden of having to sell or rent it. When I die, I think my future children will be just fine taking over whatever 401ks and brokerage accounts I have. No need for a house.

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #20 on: March 19, 2016, 07:52:46 PM »
Fair point. I guess my desire to leave my son some kind of asset is a bit vague and could be better defined. I think my intention really is to build some kind of family wealth that ultimately leads to my boy being helped in some way as he gets older.

However, I want to challenge the view that buying a house necessarily means that I will spend all my free time repairing things. In NZ new businesses have started offering factory made prefab homes that come with a 10 year warrantee. Better yet, you can buy one for about $200,000(with land an additional $200,000 or so).That will give you 100 square meters and three bedrooms - a nice, warm double glazed house brand spanking new for a good price.

If a house like this required little work in the first few years, wouldn't this be a wise choice?

Shane

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Re: Cheap rental vs getting on the over-priced property market
« Reply #21 on: March 19, 2016, 08:14:33 PM »
Fair point. I guess my desire to leave my son some kind of asset is a bit vague and could be better defined. I think my intention really is to build some kind of family wealth that ultimately leads to my boy being helped in some way as he gets older.

That makes sense, but you could also build family wealth in a brokerage account with big, fat balances invested in VTI. That way, after you're dead, your son can use that money to buy a house, if he wants to, anywhere in the world, or he could use the money to travel or pay for your grandkids' education, or...

However, I want to challenge the view that buying a house necessarily means that I will spend all my free time repairing things. In NZ new businesses have started offering factory made prefab homes that come with a 10 year warrantee. Better yet, you can buy one for about $200,000(with land an additional $200,000 or so).That will give you 100 square meters and three bedrooms - a nice, warm double glazed house brand spanking new for a good price.

If a house like this required little work in the first few years, wouldn't this be a wise choice?

It might be a wise choice.

Your earlier posts, though, said that you could only afford to get a "shitty run-down house," in a neighborhood far from where you work, which would significantly increase your commuting time and expense and the time that you'll have to be away from your family...

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #22 on: March 19, 2016, 10:41:42 PM »
I did say that and in general it is true. These companies doing prefab houses are pretty new to the market and haven't really picked up pace yet, or have much of a client base. Regardless, the only land that is affordable for people in my income bracket is quite far from the central business district - typically land that use to be used for farming and has only just been zoned residential. So I could look to build there but these new areas don't really have a community yet and they are far from amenities. Some aren't even serviced by public transport at the moment but will when there is the critical mass of residents. It is an option but there are trade offs.

On Wednesday my wife and I will visit our financial advisor to both talk about mortgages and the alternative option of investing while we stay renting. I am pretty sure he will remain impartial I'm his advice because either option will see us use his services. I will get him to run some numbers so we can make a good comparison between the options.

Bigsacks

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Re: Cheap rental vs getting on the over-priced property market
« Reply #23 on: March 20, 2016, 09:13:49 AM »

I would love my boy to have the freedom that comes with being debt free so he could live a MMM-type lifestyle.


I must say, the only true MMM lifestyle is self earned.......you can teach him and prepare him for success, but if he inherits it, he wont be the success.....he wont be the MMM.

Better to give him wisdom and experience with his Dad than give him a material possession.

Bigsacks

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Re: Cheap rental vs getting on the over-priced property market
« Reply #24 on: March 20, 2016, 09:29:43 AM »
P.S.  Financial advisor impartial....?  HA!

P.P.S.  If houses are selling $100,000 over value this is the absolute worst time to buy.....

TabbyCat

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Re: Cheap rental vs getting on the over-priced property market
« Reply #25 on: March 20, 2016, 06:19:19 PM »
I was raised with, and still hold, the idea that housing choices are more about where you want to be and your overall well being with the arrangement than about investing. This was definitely not used as a justification to overspend, if anything being more frugal held my parents back from spending much on housing but the money they saved renting improved their emotional well being. In the long run, they "lost" a small fortune by waiting until the 90s to buy, but they were happy where they lived and have still tripled the value on the house they ended up buying by staying in it. The market will keep going up and down. What's more important is your happiness, and it sounds like you have a great home. Maybe you'll even buy it one day!

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #26 on: March 21, 2016, 03:41:06 AM »
Agreed! What is most important is happiness! Renting cheaply and saving huge wads of money would make me happy now and give a greater sense of a self-created safety net. But, how long can that happiness last?

At the end of the day my motivation is a combination of wanting financial freedom and a great, secure hone environment for my family. Sometimes these two goals pull in different directions.

I kind of agree that the true MMM lifestyle is one that is earned. Raising my boy to be wise with money is definitely one of my goals as a parent. However, if I can give him a leg up in some way, then hopefully I can fast track him into a debt free life.

kiwigirls

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Re: Cheap rental vs getting on the over-priced property market
« Reply #27 on: March 21, 2016, 04:11:36 PM »
Mike, in housing obsessed NZ its hard to get a true sense of the comparison between property and share market returns.  In reality the returns over time are pretty similar.  http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10887760 and http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11543122

People will argue for one over the other depending on their personal preference.  They also tend to cherry pick time frames & examples that back up their preference rather than looking at the long run averages.  I also find that every other person in NZ has a house and rental (or wants one) whereas share investors are less common so you end up hearing only one side of the story.  Shares give you a liquid, diversified, hands off investment, Property gives you leverage, tax advantaged, high maintenance investments.  In deciding which is for you it depends on what you are interested in and how involved you want to be.

But your question is different because buying your own home is not an investment decision - its a personal one.  You buy your own home because you want somewhere to call your own, certainty over where you will live and a secure place to raise your family.  If this is what you want you should do it.  But you sound reluctant and your renting set up sounds pretty sweet so if you don't have a burning desire to own then stay renting. 

What you don't want to do is make a decision because you have FOMO ...Remember to ignore a lot of the headlines in the paper and leading stories on the news, read reputable articles on line and decide what is best for your family.

BTW who do you use as a financial advisor?  Stock broker, banker, mortgage broker?  Examine what their bias is when evaluating their advice.   FWIW I own our own house & favour the stockmarket (so you can evaluate my bias!)

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #28 on: March 22, 2016, 01:15:02 AM »
Kiwigirls, its nice to talk to someone here who knows the domestic situation, New Zealander's odd obsession with property, and the media fear mongering about first home-buyers getting on the property ladder.

To answer your question, I see financial advisors and mortgage brokers at a company called Foxplan (previously called FSB4 Financial) - http://foxplan.co.nz/ - my wife and I started going to them when she was pregnant and they helped us to tweak out budget and get sorted for life and health insurance before baby came.

I like Foxplan because they are happy for me to question them hard on all of their recommendations. I never take advice at face value and I consistently get friends who are more knowledgeable than me about personal finance to review what Foxplan advisors recommend. On almost every occasion, my knowledgeable circle of friends agree with what has been advised.   

I completely admit that FOMO - stoked by fear mongering media reports and the fact that many of my friends have bought their first home recently - forms part of my motivation to get on the property ladder. I hate to admit that because I have always thought of myself as more resistant to social norms than the average person. I guess I was wrong about that. But it is hard to see other people I know seemingly having achieved the kiwi dream of having their own home as a cosy nest in which to raise a family while I live in a house that, while functionally ok, kind of looks like a student flat (partly owing to our cheap, second hand furniture). 

It is also hard when our respective families promise to lend money at little to no interest to help my own small family purchase our first home. (This is a point that I failed to mention earlier). I mean, how can you say no to that? It isn't a huge amount, but it is enough to ensure that we have a deposit of about 33% for the price cap we have.

I am curious about shares and I am additionally curious how I could possibly maximise my current situation paying low rent for a long-term benefit.

I will discuss these things with our financial advisor tomorrow. I will provide a synopsis of the discussion in this forum in the next couple of days. It would be good to get people's views.

Jack

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Re: Cheap rental vs getting on the over-priced property market
« Reply #29 on: March 22, 2016, 08:57:10 AM »
However, I want to challenge the view that buying a house necessarily means that I will spend all my free time repairing things. In NZ new businesses have started offering factory made prefab homes that come with a 10 year warrantee. Better yet, you can buy one for about $200,000(with land an additional $200,000 or so).That will give you 100 square meters and three bedrooms - a nice, warm double glazed house brand spanking new for a good price.

If a house like this required little work in the first few years, wouldn't this be a wise choice?

No. In fact, that makes it a worse investment: how much do you think it'll be worth after that 10 year warranty expires, given that somebody else can just buy a new one instead?

There are really two kinds of "prefab" houses (at least in the US; I assume NZ is similar). The first is the "trailer home" that fairly obviously looks prefabbed because it comes in proportions roughly the right size to fit down the road (e.g. 10'x50'), or multiples thereof. The other is a factory-built modular home that is delivered in room-size-or smaller chunks, has more flexibility in floor plan choice, and looks like a traditional site-built home when it's complete. It's unclear from your description which category the house you're thinking of falls into, but be aware that "trailer homes" do not appreciate in value like real homes. Instead, they depreciate like cars!

It is also hard when our respective families promise to lend money at little to no interest to help my own small family purchase our first home. (This is a point that I failed to mention earlier). I mean, how can you say no to that? It isn't a huge amount, but it is enough to ensure that we have a deposit of about 33% for the price cap we have.

Part of your desire to buy a house is to have something to pass down to your son, so it's clear that you're a fan of inter-generational wealth. But that works both ways: if you want to maximize wealth, why should you let your parents miss out on the market returns they could have gotten by lending the money to you at below-market rates? Unless you really do think you can get returns (after the not-insignificant costs of owning a property) that exceed the stock market, your parents should just invest that money instead and let you inherit it later.

humbleMouse

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Re: Cheap rental vs getting on the over-priced property market
« Reply #30 on: March 22, 2016, 08:58:44 AM »
Keep renting.  If you really want to buy wait for the housing bubble to pop and buy when things are cheap and nobody has cash. 

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Re: Cheap rental vs getting on the over-priced property market
« Reply #31 on: March 23, 2016, 12:14:15 AM »
Hi Mike,

Put this question on the NZ Property Talk forum. There is also a Facebook group Property Investors NZ Chat.

Since we are all kiwis on there, the prices, interest rates, etc are more relevant.

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #32 on: March 23, 2016, 02:48:05 AM »
Thanks Auckland Stubble - will do.

To Jack, the prefab houses I am talking about are factory built modular homes. This is the website: http://matrixhomes.co.nz/

These homes are fairly new to the NZ market and don't yet have a proven history of performance. Nevertheless, you can purchase a basic one that is well insulated at a very cheap price. Its the price of land that is the killer.

I also get your point Jack about inter-generational wealth, and letting our parents keep the money so they can invest it themselves. However, our respective parents are of a generation where buying a house is the social norm. They just wouldn't get it if we handed the money back. In fact, they'd be affronted.

Well, I saw a financial advisor/mortgage broker today. I basically told him that although we want a secure home to raise our son, we are concerned about the heat in the property market and certainly don't want to overstretch ourselves. I also told him that I (not so much my wife) am interested in alternatives, i.e. shares, while we continue renting.

His response was quite basic really: "renting is dead money", while with your own house "you build equity".

I didn't challenge him on that but told him that I would email him a few questions regarding this advice. It seems that the standard social conventions are also entrenched in the thinking of financial advisors.



Shane

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Re: Cheap rental vs getting on the over-priced property market
« Reply #34 on: March 23, 2016, 03:12:25 AM »
Well, I saw a financial advisor/mortgage broker today. I basically told him that although we want a secure home to raise our son, we are concerned about the heat in the property market and certainly don't want to overstretch ourselves. I also told him that I (not so much my wife) am interested in alternatives, i.e. shares, while we continue renting.

His response was quite basic really: "renting is dead money", while with your own house "you build equity".

I didn't challenge him on that but told him that I would email him a few questions regarding this advice. It seems that the standard social conventions are also entrenched in the thinking of financial advisors.

Wait.....What? Is your financial advisor really a mortgage broker as well? If so, it's no wonder he's recommending that you take out a mortgage to buy a house...

Jack

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Re: Cheap rental vs getting on the over-priced property market
« Reply #35 on: March 23, 2016, 09:03:43 AM »
To Jack, the prefab houses I am talking about are factory built modular homes. This is the website: http://matrixhomes.co.nz/

These homes are fairly new to the NZ market and don't yet have a proven history of performance. Nevertheless, you can purchase a basic one that is well insulated at a very cheap price. Its the price of land that is the killer.

Weird. You're right that they more resemble the second (better) type of prefab home that I mentioned upthread, but they seem to be less flexible in design than I would have expected. Maybe it's because the company is new and they want to keep it simple for now...



By the way, just because the consensus in this thread appears to be that you shouldn't buy a property in your area right now, that doesn't mean you shouldn't buy any property, ever. For example, it might be perfectly reasonable to buy a rental property somewhere other than Wellington, despite the fact that you're continuing to rent your primary residence.

In fact, I think that's a good framework for making the decision: evaluate any potential property purchase -- even one you plan to live in -- as if it were an investment property that you were going to use as a rental. If it pencils out as a profitable rental, then it would be a reasonable investment as a primary residence too. (As a bonus, that gives you options if circumstances change: you can move without necessarily needing to sell.)

I applied this reasoning myself: my own house would easily rent for 2x my mortgage payment (maybe closer to 3x if I made a few improvements). I don't plan to ever sell it; if I decide I want to live in a nicer house I'll just keep it and rent it.

Shane

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Re: Cheap rental vs getting on the over-priced property market
« Reply #36 on: March 23, 2016, 12:05:31 PM »
By the way, just because the consensus in this thread appears to be that you shouldn't buy a property in your area right now, that doesn't mean you shouldn't buy any property, ever. For example, it might be perfectly reasonable to buy a rental property somewhere other than Wellington, despite the fact that you're continuing to rent your primary residence.

In fact, I think that's a good framework for making the decision: evaluate any potential property purchase -- even one you plan to live in -- as if it were an investment property that you were going to use as a rental. If it pencils out as a profitable rental, then it would be a reasonable investment as a primary residence too. (As a bonus, that gives you options if circumstances change: you can move without necessarily needing to sell.)

I applied this reasoning myself: my own house would easily rent for 2x my mortgage payment (maybe closer to 3x if I made a few improvements). I don't plan to ever sell it; if I decide I want to live in a nicer house I'll just keep it and rent it.

^^^This.

There are many good articles out there on how to determine whether a property would be a good investment. Here's one from the Frugal Vagabond.

Here's an article from Afford Anything, "Should You Invest in this Rental Income Property?"

As @Jack said, nobody's saying that buying real estate is always a bad idea, just that you need to evaluate each purchase individually. In some cases it makes sense to buy. In other cases it makes more sense to rent. From the information you've given us, it sounds like, in your case, it would make more sense to continue renting and invest the money you save. The fact that your financial advisor and yours and your wife's families seem to believe that it's always a better choice to buy a home rather than to rent one shows the extent to which they've been brainwashed. :)

JLR

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Re: Cheap rental vs getting on the over-priced property market
« Reply #37 on: March 23, 2016, 03:44:56 PM »
I agree with those who've said that just because it wouldn't be the best idea to purchase a PPOR, it doesn't mean it isn't a good idea to purchase an investment property of your own. That way you would have something to pass on to your son, you can get into the market (if you think this is a good idea), but you wouldn't have to personally live somewhere that increases your commute, etc.

But I am not convinced it is a great time to get into the market. Interest rates won't be this low for the life of your loan, and I don't believe that the increasing prices (here in Australia, at least) are sustainable. I think we are in for a long correction with stagnant prices, if not a drop.

I think that you should maximise the deal you are getting at your current rental. Of course, that is along the lines of what we are doing. We are paying low-standard rent for what we are getting, but every fortnight I put aside the extra money that buying a house would add to our budget. To be honest, it is a killer to our budget since my husband changed jobs. And I'm only putting aside the difference between our rental costs and a mortgage payment. I know how much more we should be putting away to cover the cost of rates, home insurance, upkeep costs, etc, as we only sold our PPOR 2 years ago.

I probably find the peer pressure to own a house easier as we have been there, done that. I have lived all the weekends we spent landscaping and caring for lawns. I have spent hours painting until I was nearly out of my mind. I have felt the worry when a rain storm comes through and I run through my mind about which conditions our flood insurance covers. And I have felt the relief when our insurance company covered the $25000+ unexpected replacement our roof.

Now we are renting I am happy knowing that our money is easily accessible if we need it. I am happy to know that we don't need to pay huge entry and exit costs when we move. When a storm came through the other day I was alert to damage to the house (so I could report it to the real estate) but not alarmed! And through the warmer seasons we still spend every second weekend caring for lawns and hedges as a nice yard is important to us. :)

A few last points:

Be wary of the modular homes. Don't expect big gains on them, or even gains that match the regular market.

If you feel your current place feels like student housing because of your furniture, buying your own place won't change that. It will likely only make you feel that you need to purchase new furniture. Another cost.

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #38 on: March 24, 2016, 04:22:15 AM »
Great advice, everyone. I really appreciate it.

After reading people's comments and reading the various links some have posted, it is clear to me that renting most certainly can leave you better off than buying - both financially and in your family life.

I am also more aware of the trap caused by holding on to lazy cliches like "rent is dead money" and a mortgage helps build equity. I hadn't realized that a significant amount of money spent on a mortgage in fact doesn't build equity and is fact lost.

I chuckle at my situation now. My wife is disciplined with money but is probably more likely to be swayed by the lazy cliches about home ownership. Consequently, we'll soon start checking out properties in the market.

However, knowing that houses are way over valued and that my wife, just like myself, doesn't want to become financially overstretched, I already know what the end result will be: my wife will realize that we have got a sweet deal renting where we are .

But I am willing to compromise. I know there are much cheaper properties in an adjacent city that buyers don't typically consider because if the commute to the business district of my city. These houses are much more affordable and some would be if a price that would allow me to only work four days per week. If we bought out there at a lower cost and then I switched jobs so I could work within walking distance to my home, I think that would be a significant win for me.

At the end of the day thus is an important decision for me because I want to be a present and engaged father, and I don't want debt to cause me to feel that I have to kiss the ass of my employer each day just to keep myself in the job. Like a lot of you, I just want to be a free  man who is self directed when it comes to choosing how I spend my time.

kiwigirls

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Re: Cheap rental vs getting on the over-priced property market
« Reply #39 on: March 24, 2016, 11:29:43 AM »
Glad we all helped.   This forum and the philosophy of MMM is about choosing a path that is different from the majority.  By educating yourself about things financial and making decisions accordingly rather than just living like everyone else (ie borrowing,spending and working all the way until retirement).  Keep building your stash - you make a good income for NZ so you must be able to sock away a good amount each month.

Mike the Kiwi

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Re: Cheap rental vs getting on the over-priced property market
« Reply #40 on: March 24, 2016, 11:48:12 AM »
http://i.stuff.co.nz/life-style/home-property/78087706/First-home-for-Auckland-couple-who-refused-to-be-defeated

Is this another example of the dumb mentality of wanting to get on the property market at any cost?

kiwigirls

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Re: Cheap rental vs getting on the over-priced property market
« Reply #41 on: March 24, 2016, 11:59:57 AM »
Perhaps...  I know I wouldn't want their 620k mortgage.  And articles like these make every other young family think that they should do the same!

Jack

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Re: Cheap rental vs getting on the over-priced property market
« Reply #42 on: March 24, 2016, 02:30:09 PM »
http://i.stuff.co.nz/life-style/home-property/78087706/First-home-for-Auckland-couple-who-refused-to-be-defeated

Is this another example of the dumb mentality of wanting to get on the property market at any cost?

It sounds like they raided their retirement account (if that's what a "KiwiSaver" account is), so yes.

my2c+61

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Re: Cheap rental vs getting on the over-priced property market
« Reply #43 on: March 24, 2016, 04:18:33 PM »

I would love my boy to have the freedom that comes with being debt free so he could live a MMM-type lifestyle.


I must say, the only true MMM lifestyle is self earned.......you can teach him and prepare him for success, but if he inherits it, he wont be the success.....he wont be the MMM.

Better to give him wisdom and experience with his Dad than give him a material possession.

The real estate question is the hard one. Purchasing a house in the NZ market could be a bit of a gamble at the moment. You seem to be comfortable renting at this stage, so as others have suggested you might be better off investing in other markets.

Look at all the bitterness that is created when someone is waiting for their legacy to be handed down to them.

With my kids I am giving as best I can at the educational stage. I feel it is better to give them a leg up at the start of their lives than to wait for us to provide latter on. 
A good education at a good school, a bit of part time work and living in a MMM household should give the kids a head start in life.
If the relo's want to throw money at you get them to put it into educational funds for the kids future. I got my parents to do this and it makes it a little easier later on.

arebelspy

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Re: Cheap rental vs getting on the over-priced property market
« Reply #44 on: April 03, 2016, 04:30:02 PM »
In your circumstance, with no info except what was given, I'd rent.

The difference being that if I remain renting, I will have a great lifestyle but no assets; but if I buy I will have an asset (which is likely to appreciate in market value) but I will be dirt broke,  and will probably have to commute long distances every day.

If you're renting, why would you have a "great lifestyle but no assets"?  Renting should leave you with much more money, which you can use to invest (aka buying assets).

If you do decide to buy though, shop around on your mortgage.

Hi have a personal dilemma that I need help with - do I stay in a cheaply priced rental or sell my soul to the bank to get a mortgage?

I'm sure you can find a bank that will give you one without requiring you to sell your soul to them.
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meadow lark

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Re: Cheap rental vs getting on the over-priced property market
« Reply #45 on: April 07, 2016, 09:39:36 AM »
Aww, you have pulled out a third option - move to a lower cost of living area and get a job there.  And, if you want a house, maybe that is the ticket.

As for meeting someone who owned a property free and clear and regretted it - nice to meet you!  I owned a beautiful property in the mountains w/o a mortgage, but my commute was as expensive as a rental 2 blocks from my job. 

It is in my psychological make-up to want to own a house (or an RV I live in.). It may be in yours, too.  It makes me feel safe.  This is in no way rational, but it doesn't have to be.  You can want and do something that isn't rational - that's allowed in life, just be smart and realize that's what your doing. 

If this actually is about your kid's future well-being, why don't you just decide you will be able to gift him a down payment when he is ready to be responsible and on his own?  You know - let him decide where he wants to live.  I am considering doing that for my kid some day.

Galactic

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Re: Cheap rental vs getting on the over-priced property market
« Reply #46 on: April 08, 2016, 05:13:07 AM »
If the local real estate market is "Booming" that would be a sign for me to rent.

I agree. Also I do not live in New Zealand but it seems the market is already heading south. Still the way prices evolve is very similar is most developed countries. My guess is that NZ will some decline in the next few years. But not very big. So probably buying in 5 years will be more interesting.

Ensign1999

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Re: Cheap rental vs getting on the over-priced property market
« Reply #47 on: April 08, 2016, 10:08:52 AM »
I've been in and around similar housing booms.  I was stationed in San Diego California in 2005 when the market out there was going crazy.  If you could afford to jump into it, you could buy a house, hold it for a few months and then sell it for a nice profit.  But, with the huge potential gains there are always huge risk.  I was renting a very small two bedroom one bath house for $1500 a month (inexpensive by SD standards).  My neighbors had purchased there house with a roughly identical floor plan (their garage had been converted to living space) and I estimated their mortgage payment was close to $3000 based on what they paid for the place and of that, very little was going to principal.  I was investing heavily (more than the difference between their mortgage and my rent).  If I only invested the difference, at the end of the two years I lived there I had roughly $45,000 in investments.  Their house value had gone up by $60,000 so if they had sold, they would have done quite well, but they didn't....the market crashed the next year and I saw online where they had sold their house taking a loss of well over $100,000!

Like everyone else, and based on this experience, IMO it is better to rent in a booming market than it is to buy.  If you like the house you are in, I would let your landlord know that you are interested in purchasing your rental.  You never know and he might be more willing to sell it to a person he knows in a deal that doesn't carry all the overhead fees a traditional sale might...and he might like knowing that he is selling it to someone he already knows.

Keep renting, staching, and watching the market in the area you want to live and maybe you might find that perfect house at the right price and time.  Right now doesn't seem to be the right time.