HomeBuyingRenting v Buying, from a FIRE standpoint
Renting v Buying, from a FIRE standpoint
4th September 2020
There are numerous discussions, and will continue to be, basically forever- about the advantages and disadvantages of renting v buying (or vice versa if you sit on the other side of the fence). If you consider it from a FIRE viewpoint- then these are slightly different, though will depend both on your circumstance, and your views.
In these examples, I’ll use some real world figures from South Wales- so if you live in/around this area, great- these will really help you. If you are living in London, or elsewhere in the UK- then these figures may not ring true, so do your own calculations etc.
I’m going to (try) and ignore all the other factors of whether or not you should rent/buy a property (like, ability to change the property etc), and instead focus solely on the financial side(s)
Table of Contents
Renting v Buying
Ahhhh, paying somebody else’s mortgage. I mean, that’s what renting is right? Well, you could think of it in that way, but it’s also paying for a service for which you get housing in return. Isn’t much like paying on PCP for the car, paying for your internet/mobile- money out, service delivered. I mean, you wouldn’t (or prehaps couldn’t) pay outright for an ISP/Phone network, so instead you rent a very small part of it which then gives you that service.
Let’s have a quick look on RightMove and see what types of prices/properties you would be looking at. Now- there is going to be a large difference in price ranges, depending on location (as they say, location, location, location), but this whole article is just an example
Llandaff North is a suburb of Cardiff- only about 3-4 miles from the center of Cardiff, depending on your mode of travel. It’s a nice-ish area, far enough away from the center to get a bit more space, but also very easy to commute. This is the area that I’m going to use for this comparison between renting and buying.
Renting is really rather simple, the £950 a month you pay, is pretty much all that you would pay for this property. Now, this isn’t always the case with flats, so make sure you are aware if you are responsible for ground/service charges above this. Sure there are bills on top- but for this, I’m going to ignore them (since water/elec/gas/council tax will be approximately the same)
Buying the property listed above is rather more complicated, but let’s simplify it the best we can (and note the figures for services like the solicitor are approx)
Purchase Price: £250,000 (assuming your offer gets accepted)
Land Transaction Tax (Stamp Duty): £0 (currently!)
Solicitors fees (approx) £1,000
Mortgage fee £1000, let’s say you pay this to get a better rate
Survey fee, £500- I mean, you don’t have to get one, but its a £315,000 purchase….
Land registry fee- £300
So, before we even talk about the mortgage costs, you have just spent about £2,800 in fees etc, before we even talk about the stress of dealing with estate agents, what offer to make and all the other mess that goes along with purchasing a property (let alone if you have one to sell at the same time as well).
Monthly mortgage costs, well, let’s assume a 10% deposit (so hope you have £25k in the bank, as well as enough to cover the fees above), so borrowing £283,500 over 25 years, with an LTV of 90% you would be looking at a monthly cost of £1,003 (interest rate of 2.44%).
So, to recap, that’s:
Renting- £950 a month
Mortgage- £1,003 a month
I always thought that renting was MORE than a mortgage?
Well, surely that would make sense, since somebody else owns that property- they will need to (usually) pay their mortgage on it, pay the estate agent, and any other fees as well, and they will want some profit as well.
So, if this isn’t the case, what on earth is going on here?
Well, where to even start, the owner of this property- didn’t pay £250,000 for it, in fact a quick search of land registry shows that they bought it in 1997 for £65,500. So, is possible that the owner doesn’t even have a mortgage to pay at all, and instead setting the rent based on their costs, expected profit & the price that the market can bare.
Also remember that the mortgage example given above is a capital repayment mortgage- so after the 25 years, the cost of this would then be £0 going forwards. Rather than renting (which would likely go up year on year) would also need to be paid until you didn’t need it anymore.
What does this have to do with FIRE then?
I’m getting there- just needed to lay out some of the costs above there! Housing, at least in the UK, is the largest cost you will have to pay. It won’t matter if that’s renting or buying, the amount you pay will be a substantial chunk of your earnings (unless your earning the big money, and you don’t up-side your housing at the same time)
Renting allows you to fix the cost of your housing, subject to the contract you sign, for the duration of your lease. There are pretty much no hidden costs, since you are not responsible for the property in anyway above just general cleaning etc. If something like a shower, roof, wall breaks/falls down- a call to your estate agent/landlord is all you need to do to ensure it’s resolved (whether or not that’s done in a timely manner is a whole other blog post).
Buying means that you aren’t fixing, well, any of your costs basically. You can get fixed rate mortgages- but even on the upper reaches of term, you are looking at 10 years at the very most. With an average mortgage term being well over 25 years now, you have a cost that you aren’t fixing that you will be liable for. Let alone the boiler dying, the fence repair, the driveway that’s coming to pieces, these are now all your costs to worry about.
However, and there is always a however, once you have finished your mortgage- then the property is yours. All yours, the banks owns absolutely none of it and unlike rent, nothing more needs to be paid. I think this is why most people tend to focus on buying/owning a property, since it means that you can reduce the amount of income you require- as you have reduced your housing costs.
It doesn’t have to be this way though!
There is nothing about FIRE that says you have to buy a property. Let alone all the lifestyle factors (you might want to move cities/countries on a regular basis), you might not have the deposit, or just not want to spend that amount of money on a single property. The risk of doing so is not zero.
You (should) have it insured, continually forever for flood/fire/damage etc- as it may not be around in 20 years.
The local area might get better, or worse- which could massively affect the price of the property. If you have rented, then you can just move to save money- or renegotiate the rent if market forces have said the area has gotten cheaper.
At the end of the day, the cost of this property, renting, is £11,400 a year. Which, if you use a 3% withdrawal rate, you need £376,200 to stay here forever. Slightly more than the house price, but it allows you to move whenever, and pretty much wherever you want- as soon as your lease is over. Financially, that doesn’t seem like a bad deal overall. Especially since that £376k should be invested in an index fund, which should contain hundreds if not thousands of companies- rather than just one house. In fact, looking at it from a risk aspect, having all that money in an illiquid property just seems….. insane?
What are your thoughts? Should somebody that wants to FIRE buy a property? Or rent forever? Or maybe live in a tiny house, canal barge, or something else?