Buying a home is, for the majority of people, a one-in-a-lifetime type of decision while renting, for many, could be a cheaper and less stressing, alternative.
Another important point here is, I am not going to push you towards either one of the two choices, that is a very personal decision that each of us should take without being influenced, but only walking you through a sort of compare & contrast analysis of the two choices with the aim of giving the readers some consideration points and helping them in the decision-making process.
There is no right or wrong, best or worst as both choices are providing a medium to long terms shelter for people, at the end on which button to push, whether it’s to rent or buy, will be entirely yours.
Plenty are the arguments and debates going on elaborating on the fact that, the money spent for rental, is money thrown down the drain without having any kind of beneficial outcome or return.
Let’s start analysing this “Rent-Vs-Buy” dilemma together to find out pros and cons of each choice and possibly define a “which-is-for-whom” reply, if possible.
The Spare “Money At Hand” Factor
A major factor in anyone’s decision-making process, of course, is related to one’s personal financial situation. However, that might not be the only aspect to be looked at as many more lifestyle considerations will affect the final choice, such as: are you looking for higher flexibility or a long term stability, what are your career goals, family planning and, at the end, whether you absolutely want a place to truly call your own.
Rent Vs Buy | Analysing The Pros and Cons
Aside from your personal financial situation, which by definition is very personal and being very well known to yourself only, there are some objective benefits and disadvantages of renting or buying that will be highly relevant in most situations. Because of this, some criteria and lifestyle requirements need to be considered and discussed here.
The above is surely not exhaustive but covers most of the main points to consider when making a decision over renting or buying.
Best would be to give some values, where possible, to each of the pros and cons to have a much clearer and numerically comparable vision of where your choice shall be.
4 Quick Tips On What to Look At During The Decision Making Process
How long are you planning to stay in the same place?
Are you and your family planning to live in the same place for very long? Maybe because of children education, nowadays there are plenty of good location where your kids can attend schools from primary till higher education within 2 km radius from the desired property location.
Or you have your own business and not planning to move it for long? Or, you want to live at walking distance from your parents’ home?
These are all very personal considerations to be looked at and seriously considered and I’ll let you do this. The tip here is on the minimum timeframe to be looked at for a buying decision is 5 years! If the replies to the questions above drive towards more than 5 years then buying might be a much better solution, later I will explain why.
As a personal advice, instead, in case your choice goes for buying a dwelling and the timeframe you are looking at exceeds the 5 years tag, it might be a wise decision to rent first for one or two years. This will allow you to know the whole area much better and be able to find the perfect property to be called your own at the right price!
I’m advising you on this as I did it for myself and it worked out perfectly.
Do a precise estimate of the cost of Renting Vs. Buying
From my personal experience, and from a more precise calculation as per table below, in the short term or less than 5 years, is more convenient to rent than buying. The breakeven point comes in at the 5th year allowing a buffer for an extra 1 / 2 years max.
Normally, when purchasing a new house, you have to bear a number of extra “cash” costs such as the down payment, legal fees for the SPA & loan agreement, insurance, stamp & duty on MOT (title or Memorandum of Transfer) registration, some renovation and furniture costs and more, up to the readers to add in. All this, being more costly, makes buying less attractive for the first few years compared to renting. Of course, in the long term the buying decision will definitely pay off.
Weight the financial risks of your decision.
Just few thinking points here to consider when deciding on the above dilemma. When buying a home, it really doesn’t matter how well you prepare yourselves, there are plenty of hidden risks and, the same goes for the renting.
Even though, no doubt, you are building an equity when buying, risks you might be facing are:
- Localised downturn of the market in the area where you have purchased. It happened before in Malaysia! The value of your house, in this case, might be dropping to below the initial purchasing price. In such scenario, you might be losing the equity, or even loss money if you need to sell the property.
- Although you did a thoughtful planning of your working career there might be an unexpected opportunity and need to relocate somewhere else due to it. In the worst-case scenario, due to economic recession, you might be losing your income or seeing it substantially reduced and need to move to a smaller house. You might not have the money to do so if much cash was tied up in the property you bought earlier.
- In case you are buying a home from the secondary market and, the property is, so to say, an old one, there might be plenty of hidden costs coming from unexpected maintenance works caused by plumbing or electrical issues.
- Last but not least, the renovation costs might be requiring large amount of money. In this case, it might be useful consider what I was saying above about renting first and then buying only two or three years later. Doing so, you might gain the extra benefit of having enough time to do a precise search to find a property matching as much as possible your likes and wishes. When this happens, the renovation costs might be kept at a minimum.
I recommend this last point, once more, from personal experience. It took me almost one year of accurate searches and countless viewings to finally find the “perfect” home I was looking for and managed to move in with less than RM10,000 in renovation costs!
As buying a property carries some risks, so does, on a smaller scale, renting it. Few points to be considered once the “Renting Vs Buying” decision moves in favour of the first are:
- Make sure you have enough money to pay for deposits and advanced rental, equivalent to 4 months of rent. This amount has to be paid to the landlord before he will allow to move in
- Even though you are a good tenant paying your rents on time and taking good care of the property, you might still be asked to leave if the landlord, say for example, sells the property.
- Normally rental increases every year or two, due to inflation and market trends. Make sure your salary also increases concurrently to be sufficient to always cover the increase of rental.
Do a full and honest assessment of your financial situation
Too often I’ve heard and read horror stories of young adults being badly cheated by very unscrupulous and self-proclaimed “property gurus” teaching them to buy multiple properties at a time or a large house beyond what they can afford. Several times I’ve helped some of those unfortunate victims of the above gurus (not to be named at this point of time) in finding solution for their financial distress.
Whenever you start considering the possibility to purchase a house, or a property at large, the very first thing you should do is to do a stress test on your financial health. Assess everything always looking at what your income is today and not what you are expecting to achieve tomorrow.
Make sure all your dues are payable, beside the new big monthly commitment that a house represents. Budget no more than 35% of your net income for your housing loan repayment. Make sure too, you will have enough to live the lifestyle you want and, possibly spare a bit every month to be saved for tough times.
Final Thoughts
When the time comes for you to make a decision on renting or buying a house, if possible go through this short article one more time, do all the homework with an accurate analysis of the property, the location and the two costs or, the cost of renting Vs the cost of buying and then only make your decision.
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In the event, you want to explore further on the two costings of renting and buying, have a look at this Rent-Vs-Buy calculator, which could be very useful. Just take note that it is designed for the US property market and not Malaysia.
Finally, no matter what decision you will make, it’s crucial that it is going to be an informed one based on your financial situation, employment/income current situation and lifestyle.
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