The Australian real estate market is booming at the moment. And it’s about that time of the year when Aussies who have their eyes set on property investment study the market and draw up their financial plan for the coming year.

Among the numerous opportunities available to investors, investing in houses and units seem more understandable and straightforward. As if that’s not appealing enough, the consensus is that property investment is secure and guarantees a return on investment (ROI).

 

What About The Alternative, Rent?

When renting a property is stood up as the natural alternative to buying, the opinions of proponents of property investment couldn’t be more clearer: “paying rent is like throwing money into a pit”. That statement is only true if we assume property investment always yield returns which is simply not the case.

 

Consider what happens when the price of houses falls, that means renting becomes more attractive and the smarter choice at that moment. No thanks to the chaos caused by the COVID-19 pandemic, we are seeing the prices of some rental properties decline in certain Australian cities.

 

The rent vs buying debate is interesting one when you factors in the dynamics of property investment and the peculiarities of the Australian market. Therefore, like for every financial decision you consider, due diligence must be carried out before you throw money at it.

 

Here, we discuss some of the essential pros and cons to consider when deciding whether to buy or rent a property. Also, we analyze the Australian property market over the past few years and see how it has worked out for investors on both sides of the divide.

 

Cost of Buying vs Cost of Paying Rent

Investing in real estate means we are talking about big numbers. The associated costs incurred buying and selling a property can be substantial. Things like stamp duties and other costs associated with buying a property, including conveyancing, can add up to 4.3% of the total cost, according to The Reserve Bank of Australia (RBA).

 

The seller also incurs some costs, including agency fees and advertising, which can total 3.0% of the total costs of the property itself.

 

Renting a property can also be expensive, especially when you are going to be doing so in major Australian cities like Melbourne and Sydney. Similarly, the annual rental costs for houses varies from 2.0% to 5.0% of the property value depending on some factors, including location, and type of property.

 

Buy or Rent: Ownership (Running) Costs

When you buy a property, there is a cost associated with ownership of the said property. The RBA estimated that these running costs can amount up to 2.6% per annum. It could be higher when you factor in the location of the property. Some of the annual costs associated with owning an investment property include council rates, renovations and repairs, water insurance and even depreciation.

 

When you rent instead, there’s no cost associated with the property because of your tenancy. Except for a situation where the property owner is claiming damages to their property, there’s no extra cost for being a tenant apart from the rental fees.

 

Buy vs Rent: Flexibility and Freedom

Buying a property gives you stability and security. And you’re at liberty to do however you please with your property. For instance, you can decide to renovate it or paint it red, always your call.

 

While owning your property gives you more security, there’s greater flexibility when you rent real estate. Firstly, renting means you’re not tied down to a location or place. This sought of flexibility is most appreciated in the lives of young professionals and families who may have to move often from one location to the other because of their careers or education.

 

Buy or Rent: Which One Come Out Tops?

What’s clear at this point is that buying a house is not the clear winner property investors make it out to be. At least, people should think twice before getting their life savings tied up in a house. The opportunity cost and loss of leverage make property investment a huge risk to those who desire quick riches.

 

From statistics collected over the last 60 years, property buyers and renters have accrued similar returns on their financial choices. Even though this is dependent on the renters being financially disciplined, it is proven that diversifying their investment can deliver stable returns.