Case study Unemotional option - buy outright or rent?

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Listen67

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My wife and I were having this discussion about the differences between purchasing a house outright (i.e. cash buy) versus renting a house.
One view was that renting is pure dead money and therefore it's a no-brianer to purchase rather than rent.
However, the other view is that renting and investing available funds wisely is a valid alternative option and does not necessarily mean financial loss!

From a strictly financial POV what would the financial differences be between buying a house outright (i.e. cash with no borrowing) versus renting a house/home and investing the capital?

For the purpose of this question, the investment risk should be close to that of a the risk of investing in property (if this is possible to deduce)

Here is the example scenario:
  • Purchasing a house outright for €300,000
Against
  • Renting a similar house for €1,000 p/m and investing the €300,000
thanks
Sean
 
Major downside to renting and investing the money is that any gains on investment are taxable whereas there is no tax relief for renting or capital gains tax if you end up selling for more than you bought for. Also rent may well rise in future years and end up eating away at the capital.
 
€1,000 per month is €12k per annum in rent. On a house worth €300k this is a 4% yield.

There are no 4% yields anywhere in Ireland on houses, except on very large houses in certain parts of Dublin.

The national average yield for 3-bed houses is 7.6% So a more realistic comparison is about €1,900 a month in rent for a house you'd buy for €300k.
 
Another issue is actually having that €300k to invest, a bank will give you that money to buy a house, they won't generally to invest.

But assuming that you did have €300k knocking around, very simplistically -
Option 1: If you bought the €300k house and it increased in value by an average 4% per annum (not sure what the figure for Ireland should be over long time lines?) for 30 years it would be worth €975k. You'd have paid €30k in LPT along the way, and maybe something like €50k in maintenance (that would be covered in a rental). Final position about €900k.
Option 2: If instead you invested the money and it grew at say 6% per annum (stockmarket level returns), it would be worth €1.4m after 30 years, less CGT you'd have €1.1m. Assuming rent increases at 2% per annum (figure picked out of the air, open to suggestions), after 30 years you'd have paid €485k in rent. Final position is about €600k.


It's really all about the assumptions of course, but in most cases I think I've favoured the renting scenario here. €12k rent may be low depending on where the house is, 6% growth in your investment is probably aggressive considering you asked for property-level growth and I used 4% when calculating the house value increase, CGT may well go up closer to income tax levels or deemed disposal rules get widened, rents have been increasing by more than 2% for quite a while in Dublin anyway. Interesting all the same!
 
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NoRegretsCoyote said:
€1,000 per month is €12k per annum in rent. On a house worth €300k this is a 4% yield.

There are no 4% yields anywhere in Ireland on houses, except on very large houses in certain parts of Dublin.

The national average yield for 3-bed houses is 7.6% So a more realistic comparison is about €1,900 a month in rent for a house you'd buy for €300k.
Click to expand...

Thanks for thr reply 'NoRegretsCoyote', however, in Donegal, (Letterkenny) rent for a €250K house is around the €800 mark, so significantly less than 7.6% yield.
 
Zenith63 said:
Another issue is actually having that €300k to invest, a bank will give you that money to buy a house, they won't generally to invest.

But assuming that you did have €300k knocking around, very simplistically -
Option 1: If you bought the €300k house and it increased in value by an average 4% per annum (not sure what the figure for Ireland should be over long time lines?) for 30 years it would be worth €975k. You'd have paid €30k in LPT along the way, and maybe something like €50k in maintenance (that would be covered in a rental). Net position about €900k.
Option 2: If instead you invested the money and it grew at say 6% per annum (stockmarket level returns), it would be worth €1.4m after 30 years, less CGT you'd have €1.1m. Assuming rent increases at 2% per annum (figure picked out of the air, open to suggestions), after 30 years you'd have paid €485k in rent. So your net position is about €600k.


It's really all about the assumptions of course, but in most cases I think I've favoured the renting scenario here. €12k rent may be low depending on where the house is, 6% growth in your investment is probably aggressive considering you asked for property-level growth and I used 4% when calculating the house value increase, CGT may well go up closer to income tax levels or deemed disposal rules get widened, rents have been increasing by more than 2% for quite a while in Dublin anyway. Interesting all the same!
Click to expand...

Thanks Zenith63
So using your calcualtions based on those assumptions:
Option 1) Buying a house returns €900K net
Option 2) Renting and investing returns net €600k
Thats a substantial difference of €300K and a clear winner for buying over renting..

If only there was no CGT on stock market investments... :-(
 
Listen67 said:
Thanks Zenith63
So using your calcualtions based on those assumptions:
Option 1) Buying a house returns €900K net
Option 2) Renting and investing returns net €600k
Thats a substantial difference of €300K and a clear winner for buying over renting..

If only there was no CGT on stock market investments... :-(
Click to expand...
Net was probably a poor choice of words there. You had to invest €300k in both cases, so really your "net"/profit is €600k for Option 1 or €300k for Option 2. But either way, based on those assumptions (lots could be challenged in them to be fair!) renting does not look like good financial sense to me. There are also intangible benefits to buying over renting I think; you can make alterations to the property, truly feel at home etc.
 
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House prices increasing 4% per annum ad infinitum may turn out to be a rash assumption

Once we build enough houses for everybody, as promised by all political parties, there is no reason why house prices should increase by that amount, at least not in real terms

There are downsides to owning a home - repairs and maintenance, property tax, ...
 
The main issue I would see is if you buy you have the house indefinitely eg next 50 years
And something of value to pass on to next of kin

If you use 300k to pay the rent, I'd say you'd be covered for 25 years.
 
Don't forget the emotional cost of finding rentals and being at the mercy of landlords. I enjoyed the flexibility of it for years but now with kids I put value on home ownership.
 
Ensure you have a home first - that's important imo. After that, investing wisely can follow.
 
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