Is Renting Really Dead Money?

JohnInDebt

I've seen a number of threads where people are desperate to get on the property ladder and have indicated that they believe renting is dead money. Renting might not be the ideal long term solution but it can work out a lot cheaper than buying and if you put the savings into an ISA or other savings account you could almost be just as well off after 25 years.

For instance, I currently rent at £375 per month on a property valued at approx £120,000 (although £450 seems to be the average for my area on that property value). For my calculations I have assumed £450 per month as I expect it's more of a realistic value.

Rent Per Month: £450
Rent Per Year: £5,400
Rent 25 Years: £135,000

To buy a £120,000 house on a rate of 5.5% this is what the payments would be:

Mortgage Per Month: £745
Mortgage Per Year: £8940
Mortgage 25 Years: £223500

So by having a mortgage I would have a property worth £120,000 (todays value) but would have to spend an extra £88,500 over 25 years. Surely if his £88,500 was invested wisely it would almost be worth the property value after 25 years? Obviously the mortgage calculations exclude House Insurance, Maintenance etc.. so even more money could be invested every month for a better return.

I believe that renting is no longer dead money whilst the house prices are so high and rent is relatively low in comparison. Obviously these are all rough claculations looking at todays market but the current property prices cannot rise like this for the next 25 years.

Your thoughts?

Bargain_Rzl

You should factor in the fact that rent is likely to rise roughly with inflation.

Also, at least with the mortgage, after 25 years you stop paying it. If you're renting, you'll have that payment going out for the rest of your life.

I still don't think renting is necessarily dead money though.

briona

I'm 29 and have rented since I was 18. People always tell me that renting's dead money but I would sooner rent [at the very affordable £185pm that I pay now] than force myself into debt by buying into the idea that one must get on the property ladder at all costs!

Obviously if you earn anything, you should be able to afford a mortgage payment somewhere [albeit not in the area you desire] but there's a lot more that I feel people fail to take into consideration when leaping onto the property ladder, e.g., buildings/contents insurance, furniture, white goods, higher council tax and bills, repairs etc... As a renter, these are my landlord's problems, and [case in point] just last month he bought and installed a brand new washer/dryer at a cost of £400, and repaired the boiler for another £300... If I were the homeowner, on my salary, I'd have been in serious trouble!!!

Speaking of which, on my curent salary, the biggest mortage I could get would still leave me with around a 70K shortfall against the [cheapest] local house prices... and sadly my savings account has nowhere near that in it!!! Hence I have just resigned myself to the fact that as a single person on my salary, I will never be able to get on the property ladder. But, and maybe more importantly, I have absolutely no intention of bankrupting myself trying to do it!!! Instead I will continue to rent and put the money I am saving doing that towards more holidays! Dead money? I think not!!!

Debt_Free_Chick

JohnInDebt wrote:

So by having a mortgage I would have a property worth £120,000 (todays value) but would have to spend an extra £88,500 over 25 years. Surely if his £88,500 was invested wisely it would almost be worth the property value after 25 years?

Quite possibly, yes it would be worth the same. Or it could be worth more, depending on how you invested it - and the way those investments performed compared with property prices.

But another big difference, that is often overlooked, is that you would have cash. Whereas a house-owner would simply have a property i.e. not cash. Whilst it might be seen to be advantageous to own a property outright, it does mean that you have money tied up in bricks & mortar. You would then need to downsize (or, if suitable, do equity release) in order to get at your cash, if you wanted or needed it.

You make a good point that is often not taken into consideration. We generally have a superior view of property ownership as we seem to have a need to own property. In reality, most of us simply need somewhere to live.

Regards

westernpromise

The economics of renting versus buying change over time. When you buy, however, you're not buying outright - you're renting cash from the bank and buying with that. When you rent you rent the house directly rather than the cash to buy it.

Given that current rental yields equal interest rates pretty closely in most parts of the country, there is very little difference. Renters are protected from falls in capital value and from surprise maintenance bills, but have no latitude to alter or reconfigure their property, can be made to leave whenever it suits the landlord, and capital gains will cost them twice - they don;t get to keep them and a higher property price is likely to push their rent up.

AndrewSmith

It is not 'dead money' as you are gaining the use of a property in return for the monthly outlay.

It would only be dead money if you were paying the rent each month but still living at your parents house, or throwing £450 pm at drink & cigarettes.

Bargain_Rzl

Here's a question:

If a lot of people are prepared to overstretch themselves to "get on the property ladder" (I hate that phrase!) and end up paying maybe three-fifths of their monthly salary in mortgage payments when they could be renting for more like two-fifths, then what is stopping people renting with two-fifths and investing the extra fifth?

It just isn't done, is it? (In general, I mean. I'm sure a lot of MSEers are more savvy.)

What can be done to persuade people that this is a viable, and possibly even preferable, option? Of course it only works for people whose salaries stand some chance of supporting the choice in the first place, but this has got me thinking.

This doesn't apply to me, renting or buying a 1-bed flat in my preferred (not upmarket at all, but still London) would be more or less equal - but on the other hand, I'm now buying a shared-ownership flat which undercuts what I would be paying on an outright rental or an outright purchase by about £150 a month. I'm intending to overpay the mortgage as much as possible at first - but I am now considering whether in the longer term I'd be better off investing that surplus elsewhere. Of course when I say surplus, I mean money which I could find if necessary, with a few lifestyle sacrifices involved.

I suppose my point is, why is a mortgage the only kind of accommodation provision that people think it's worth stretching themselves thin for?

jodenice

Well I've rented since i was 16. I don't think (coming from the South East and now living in London) that I have ever paid less than £450 per month. I now pay £736 per month for an absolutely grotty flat in North London that I am not allowed to make any improvements to and know for a fact that the landlord will desperately try to hold onto his deposit when I leave (I keep getting emails from him telling me about how he short he is of money).

Yes, I've paid for something and got use of a property in return, and I've been able to move about a lot more so you can't class it as dead money but I do think sometimes, a bit wistfully, in the 15 years I've been renting I could easily have purchased a property!

zag2me

In your example, imagine in 25 years time paying £3,000pm for your rent due to inflation. This is entirely possible.

As everyone else says, its not dead money, but its certainly much better to get on the housing ladder sooner rather than later.

Jim_B_3

Renting is as much dead money as buying food is. Or clothes. Or anything else that has a lifetime less than you. I don't see people urging each other to grow their own food or manufacture their own clothing, though.

JohnInDebt

zag2me wrote:

In your example, imagine in 25 years time paying £3,000pm for your rent due to inflation. This is entirely possible.

As everyone else says, its not dead money, but its certainly much better to get on the housing ladder sooner rather than later.

There are too many 'if's' which is why I did some quick calculations based on todays market and rates. The 'if's' could be applied to any scenario.

The same could be said if the interest rates went to 12% meaning that mortgage payments would go through the roof and the people who decided to save would be even better off.

I definitely not knocking buying a house as I will be looking to buy in 18 months, I was just frustrated at the number of people that see renting as dead money without looking at the bigger picture.