Renting can sometimes feel like you are trapped paying for someone else’s dream. You try to save for a deposit on your home but there is nothing left at the end of the week and you are trapped in the never-ending cycle as rent, utilities and groceries increase and your wages are stuck where they are. If you have been renting for a long time, you probably know this pain all too well but there is a silver lining to this story, renting is a smart financial decision.
If you look at the financial side of things, life isn’t all too bad. Sure, you might have to move around often if your landlord decides to take back the house and rental rates are not getting any lower but what is the alternative? Having a mortgage means you will have a less flexibility in when and where you can move, you owe money to the bank which means the house is still far from being 100% your own. You might be paying down the mortgage but the interest you are paying means you are not free from the concept of dead money not to mention the numerous other expenses which come with owning a home that you will need to stay on top of.
So, owning a home might not be as financially sound as it may seem, you might still think renting isn’t exactly that cheap either but here’s where we consider opportunity cost. Opportunity cost is when you give up the benefits of one decision for another. For example, purchasing your own home with a $100,000 deposit means your opportunity cost is the alternative for that $100,000. Say if you were to invest that $100,000 while continuing to rent, where would that leave you?
An article in stockspot earlier this year demonstrated that while the average house price in the major Australian cities has increased dramatically in recent years, there has been less of a focus on other asset classes such as shares, bonds and cash. The article had identified that both property and shares have increased roughly 11 – 11.5% pa over the past 30 years. While everyone has been looking to buy a house, there have been a select few who have been renting while investing their savings to put into the share market and while property is now reaching its peak, shares are starting to move into the recovery phase of the market cycle meaning there is huge potential for growth.
Not everyone understands the share market and it is sometimes safer to only invest in what you do understand. When you think you renting, you might not consider that purchasing a property to live in is not the smartest financial move considering the returns found elsewhere.
Rather than following the crowd and going for the deposit on your first home, take a look at the numbers and decide what would be best for your future. Your home is not an income producing asset and won’t pay for itself, an investment on the other hand will and has potential to build wealth and security which can far outpace the capital appreciation on your home.