To buy or rent? That is the question.
“Rent money is dead money,” or so they say. But does renting deserve the bad rap that it often gets? In the first section of this three-part article, I will explore a more nuanced and objective appraisal of the age-old debate. Renting isn’t an investment, of course, but an affordable rental can actually be a means of saving up for a property that you can eventually purchase and turn into an investment at a later stage.
Pay careful attention to your financial position
There’s a reason that ‘mortgage’ has its roots in the Latin word ‘mortuus’, meaning ‘dead’. For many people, the idea of failing to pay back a mortgage is a very real feeling. Sometimes — and often through bad luck and no fault of the homeowner — a person who takes on a mortgage is unable to pay back their debt, and they end up losing the house through foreclosure. It could be because they have become ill or injured and can no longer work, or it could be because they were made redundant or fired, or it could even be because they were given a bad loan that they shouldn’t have been given in the first place.
For an example of this happening on a large scale, one only has to reflect on the US subprime mortgage crisis that lasted from 2007 to 2010. Banks handed out loans like they were going out of style, and many people — including entire families — found themselves without a home once they failed to make their repayments. For many people who weren’t embroiled in what can only be described as an economic and humanitarian calamity, some perspective should be given. While the normal foreclosure rate in the US was less than 2% before the turn of the millennium, this number shot from about 5% in 2005 to more than 40% of all subprime adjustable rate mortgages being past due in 2008. This number is terrifying, and many people to this day are still in recovery mode.
What can we learn from past catastrophes?
While anyone applying for a home loan will need to be approved, prospective homeowners should examine their own finances to make sure they can be supremely confident that they can repay their mortgage, lest they suffer the terrible hardships that millions of Americans suffered during the crisis. Another thing to consider is renting until you can afford to buy a house outright. Naturally, not everyone will have the luxury of such an opportunity, but doing so will all but eliminate the chance of losing your home, since you won’t have any collateral to lose. It will also give you more flexibility to focus on your career instead of losing sleep from worrying about paying back an exorbitant mortgage.
Remember: While rent money may be dead money, paying significantly more of your income into a mortgage only to lose it all later is much more devastating. This isn’t even factoring in the interest on the total value of the loan.
What is the right answer, then?
The real answer is that there is no right answer that can be applied in a generic sense (which is, of course, to be expected). However, it never hurts to do the sums. If you need to, speak to a financial advisor. If you are a freelancer who wants to apply for a mortgage, ensure you have multiple reliable streams of income that will sufficiently cover a mortgage over time. If you are on a fixed contract with a salary, ask your company if you can negotiate a long-term contract. Additionally, keep accurate records of income to prove to a bank that you can consistently bring in a sufficient amount of income to cover mortgage repayments. Additionally, figure out how many years are optimal to repay your mortgage safely and with minimal stress.
Do not feel pressured to buy when you are not ready to. Other things to consider that might make rent a more attractive proposition for now include the total cost of stamp duty, inspections, conveyancing, and insurance — all things which prospective first-time home buyers will need to thoroughly evaluate when looking at buying a property. Finally, an American study actually found that median-income families would routinely end up with more net wealth if they rented. If in doubt, always err on the side of caution, lest you become another tragic victim of foreclosure.
Renovating for a profit: Where to draw the line
If you’ve made the decision to buy your property, you’ll now be able to implement renovations to improve your property. If you’ve decided to rent instead of buy, then this probably won’t be a realistic option.
With television shows like The Block taking Australia by storm, it’s little wonder that there are now countless Australians asking themselves whether they have what it takes to turn that “dump down the road” into a polished jewel. You might be thinking, Hey, if two school teachers with no prior renno experience can flip a house for an extra half a million in just three months, what’s stopping me?
You might be right . . . but you could also be catastrophically wrong. It’s certainly not something you should do on a whim. Indeed, you should also carefully consider your financial position when thinking about renovating a house. For example, let’s say you set yourself a $50,000 budget for renovating a house. You do the sums and figure that the modifications you make — if done to a high standard — should net you about $250,000 in profit.
Sounds good so far, but you need to make a bulletproof contingency plan. For example, what happens if your newly laid concrete patio doesn’t properly drain the water? Sure, you might have taken all the precautions beforehand to make sure the drainage system was adequate, but maybe your setup doesn’t adequately handle heavy rain, causing the drain to suffer blockages and possibly even create localised flooding. Even if you go to great pains to ensure your drainage system is sufficiently designed and installed, there is still a plethora of other things that can go wrong. Knowing what can go wrong is what separates a novice renovator from a seasoned professional.
Even the professionals rarely get through an entire build without at least something going awry. It doesn’t even have to be the fault of any individual contractor or building firm, either — sometimes mother nature throws a spanner in the works that you just can’t predict. Maybe a wild animal got its paws into the concrete as it was setting. Such a minor event won’t be disastrous in the grand scheme of things, but the larger point is that your budget shouldn’t just be how much you expect to pay. If you don’t factor in a sufficient margin for unexpected overages into your budget, you might just find yourself compounding a manageable problem into a nightmare. Don’t let a lack of foresight keep you up at night, wondering how you managed to put yourself into serious debt because you didn’t give yourself enough financial breathing space.
Speaking of breathing space, if it’s your first attempt at renovating a house, this is probably one of the few cases where you might want to consider avoiding inspiration from the maxim “reach for the stars”. A common strategy in renovation (and construction at large) is to not spread yourself too thin. Speaking of thin (to use a pertinent analogy), if a person is looking to get in shape and lose weight, they shouldn’t constantly overwork themselves to the point of exhaustion; they should gradually build up their stamina to transform their body over an extended period in a controlled and consistent manner.
Similarly, in renovation terms, a solid approach (especially for first-time renovators) is to break down the process into smaller parts. Perhaps you can start with the patio. Once that’s done, move onto the kitchen, which will soon allow you to move onto the bathroom, etc. Besides the psychological benefit of not feeling overwhelmed, breaking up the renovation process into manageable chunks allows you to safely pause the renovation process after any particular sector is complete. Best of all, unlike trying to do everything simultaneously, you will still have an improved property if you need to abandon the build for any reason; conversely, if you ended up with half-completed structures or installations, you might actually decrease your property’s value. The only thing worse than a property in need of a renovation is a property with a botched renovation.
Looking to lease out your property? A quick guide to avoiding empty houses
Ideally, no property investor wants empty houses. For many investors, receiving rent from tenants is an excellent way to supplement income or offset a mortgage payment. Now that you’ve renovated your house to your liking, I’ll cover several important points that need to be considered when leasing out a property.
As they say, you only have one chance to make a good first impression, and this couldn’t be truer in the world of real estate. When photographing your house for advertising online or elsewhere, it is imperative that you make sure the house is clean, presentable, and adequately lit. If there is a garden, try to have photos and inspections soon after the garden has received a thorough spring clean. If you have the budget for it (and you really should), it can be a good idea to have a professional photographer take photos for you.
Know your house’s rental value
Like many things that attract a price tag, the price of rent can fluctuate according to a number of factors. It is in your best interest to always stay abreast of market trends and prices in the property sector, and be sure to regularly update your prices to reflect the market. Careful pricing is key — if you price the rent too high, people won’t sign on; if you set it too low, you won’t be getting maximum value for your investment. A typical mistake is to charge more than the market can bear, so make sure that you price your property fairly aggressively. Remember that overcharging for rent will hurt you much more than going slightly under your ideal price, since every week you go without tenants, you will be losing hundreds of dollars in potential income, so don’t get greedy.
When advertising your house, always be 100% transparent with the costs involved, because the last thing you want is a hoard of people inspecting a house but not realising that, say, utilities aren’t included. If the room/house is furnished, say so; if it’s not, mention that as well. One other crucial element of advertising your property is to make sure (if possible) that you advertise your property at least a month out from when it is scheduled to become vacant.
This will do two things:
1) Minimise the stress involved when leasing out your house.
2) Ensure that your property is only unoccupied for a small window of time.
Advanced advertising has the potential to save you hundreds, if not thousands, of dollars.
Keep your property well maintained
Nothing turns off a prospective renter like a poorly maintained property. This is especially true when a property changes hands. Use your two weeks’ notice to fix every outstanding issue with the property. Ideally, of course, you’d have these issues fixed as they arise, but unfortunately this isn’t always as easy as it sounds. Despite houses being great long-term investments, you still need to make sure your house doesn’t become dilapidated due to negligence. It also doesn’t hurt to have routine inspections of the property. By including a bond in your rental agreement, you give your tenants motivation to treat your house like they own it.
Maintain an up-to-date database with available tenants
Finally, technology has made the process of securing tenants a seamless, hassle-free process. A database allows you to easily schedule bookings, and you can have a list of backups on standby — just in case an arrangement falls through. Additionally, a well-crafted database makes double-booking accidents a thing of the past, since every inspection entry is easily saved into an organised and dynamic database.