Article by David Easterbrook
The answer to this question is easy to answer by applying a number of industry benchmarks widely accepted. An investor in Melbourne will expect a rental yield of 3.5% – 4%…this is the rent a tenant will pay to the landlord.
An investor buys an investment property for $550,000. At a rental yield of say 3.75%, the rent per week would be roughly $400 per week. However, if the tenant decides to buy a property instead of rent, they would need to have a minimum of $55,000 in savings… Based on this, their loan would be $522,000 plus lenders mortgage insurance would bring their total loan to $540,000.
Now we have established the numbers, all we need to do is work out the repayments on $540,000 at the interest rate of the day to see if renting is cheaper or more expensive than buying.
$540,000 @ 5% interest = $27,000 per annum (PA) or $519 per week (PW), interest only, or $669 PW principle and interest. Whilst renting, you are only paying $400 per week……a saving of approximately $150 to $300 per week! IN THE
SHORT TERM IT IS CHEAPER TO RENT THAN BUY
The above is the detailed way of saying this …5% interest versus 3.75% yield (rental payments) means it is cheaper to rent than buy….BUT, if you have purchased in a suburb with approximately 8% capital growth per annum ….in 10 years’ time the difference in the equation is substantially different.
Assuming that the property was purchased at $550,000 the should the value of the property grow at 8% per annum, the property will worth $1.2M. That is an increase in value of $650,000 at an interest only cost of $120 per week, assuming interest rate stays the same.
IN THE LONG TERM, IF YOU BUY A PROPERTY WHICH WE WOULD DEEM TO BE AN EXCELLENT INVESTMENT PROPERTY AT THE SAME TIME, YOU MAY LOSE OUT ON HUNDREDS OF THOUSANDS OF DOLLARS BY RENTING AND NOT BUYING.