Adages like 'Own your own home before you invest’ and ‘rent money is dead money’ are problematic.

It’s rarely that simple.

What's right for one person doesn't hold true for the next. You have to take your personal circumstances into account.

With property, it’s even more complicated than other types of investment.

Two properties can be next door to each other. Same suburb. Same street. One can turn out to be a great investment, while the other can end up a money trap. You have to look at them on a case-by-case basis as well as your personal context.

For this reason, generalisations tend to be limited in usefulness.

So, I've created a calculator. It helps you compare the cost of owning versus the cost of buying the same property. At least this way, you can take the numbers into account. As for the emotional part of the home-buying decision - that's up to you.

The link to the spreadsheet is at the end of this post, and I’m working on a simple online calculator that just gives you the summary. I’ll let you know when that’s ready.

Before you jump into it, here's some things to think about:

Buying a home takes upfront capital

When you go to buy your first home, you'll likely find you need the following cash saved and ready to go:

• A deposit - tens or hundreds of thousands of dollars (even millions for some) that allow you to get a mortgage. If your deposit isn't big enough, you may have to pay...

• Lender's Mortgage Insurance (LMI) - which covers the lender in case you can't pay the loan.

• Stamp duty - can be tens of thousands of dollars. Depends on which state the property is in, and whether you qualify for exemptions.

• Inspections - building and pest are the most common ones to include as terms in the sale contract. While only a few hundred dollars each, they're the buyer's responsibility. Add ‘em to your total.

• Conveyancing - most people will use a professional to execute the deal for them. That can be anything from several hundred to a few thousand dollars.

• Loan establishment fees - money you pay the lender to do the paperwork and set up your account.

You may be able to roll a few of these into the mortgage. This then limits the value of the property you can afford with what you can borrow, so some opt to pay it all in cash. Once you lock up capital in the property, you can't do other things with it.

Which means...

Tying up capital has an opportunity cost

You could do other things with that cash, like buy a parcel of diversified shares. The original cash then becomes worth more over time, thanks to share market growth.

You're giving up that potential growth.

In most cases, we're hoping the growth of the property price makes it worth it. Because you get all the growth for just the deposit (thank you leverage), it might outstrip the shares. But there's one advantage shares have over a home:

Shares can pay dividends, providing an income. Your home doesn't pay you while you live in it.

Further...

There's more than the mortgage to pay

People often say 'but I'm paying in rent what I could pay in a mortgage!'

You have to allow for more than the mortgage in your monthly calculations.

On top of the mortgage, the homeowner pays for:

• Rates - to the local council. This is for services like rubbish collection and maintaining local parks.

• Insurance - in case the building gets damaged, for example by fire or flood.

• Maintenance - when something breaks and insurance doesn't cover it, it's up to the owner to fix it.

• Strata fees - in the case of strata properties with shared land/facilities. Owners typically contribute to sinking and administrative funds.

So, take that mortgage cost and add a premium to get the true annual cost of owning the home. I’ve found it’s around 20% extra, but it depends heavily on the property so get some info to work it out on the property you’re considering.

Even with all that...

You're still at the mercy of a lender's approval

Lenders run businesses that sell debt.

The deposit and LMI isn't for your benefit. It's so the lender is unlikely to lose money on the property if they have to take it off you to recoup the loan.

Further, if a property has negative equity - the price is less than the debt - it's bad news. The lender has to lend less elsewhere to keep enough in reserve. This helps them meet Australia’s capital adequacy requirements.

If you don't have enough equity and cash flow to meet the lender's terms and models, you probably won't get the loan. No matter how much you're spending on rent right now.

(I didn't say it was fair.)

Still, it might all be worth it if...

The emotional benefits can outweigh the costs

...even in situations where renting would be cheaper in the long run.

Housing security is an essential part of life.

I'm embarrassed we need a bill in Parliament to declare housing a human right, but here we are. Stating the bleeding obvious yet again.

Knowing the home you live in is yours and no one can throw you out of it is a recipe for good sleep for some people.

I didn't relate to that feeling until I had kids, but some people feel it much earlier than I did.

Others don't ever feel it. They're happy renting for their entire lives. That doesn't make their rent 'dead money' - it's the price they are happy to pay for a roof over their heads.

Either way, remember...

Your needs can - and do - change

As our lives evolve, so do our needs.

At various stages of your life, your housing tends to adjust to suit your lifestyle and priorities.

I loved owning a home while my kids were young. No rental inspections and no stress if they draw on the walls with a Sharpie was awesome.

Now that they're older and I trust them with Sharpies, I am revelling in a temporary stint of renting.

We'll go back to our home eventually (we're temporarily leasing out while we're renting two hours away). I'll enjoy being able to install a grey water system when we get back, but I'll also spend a lot more time working in the garden.

Maybe when the kids leave home, we’ll look to move into something else.

Which is why it's important to note...

The cost comparison only works if you stay put

The calculator I've made looks at owning versus renting over 30 years.

That is, owning and living in the same home continuously for 30 years.

You can move to different rentals as much as you like in that period, the calculations won't change much on the renting side.

In reality, Australians live in the same house for just over a third of 30 years - 11.3 years on average. For apartments, it's less than a third - 9.6 years.

Those homeowners will likely have equity in their home when they move to the next place. The extra they paid up front and in interest plus ongoing ownership costs is usually worth it, depending on what the market has done between buying and selling.

...but if they sell to buy a new home, they'll often be getting a new mortgage.

And paying another lot of stamp duty.

And paying an agent's fee on the sale of the last place.

Or, they'll keep that property as an investment and buy/rent somewhere different.

On that basis, it's very hard to say that owning a home is cheaper than renting even with the numbers, because moving just once could derail the scenario.

Keep that in mind when you use the calculator.

How the calculator works

The calculator tells you four things for a given scenario:

1. Excluding deposit and stamp duty: when does renting cost more than owning per year?

Cost of owning is calculated as:

• Mortgage cost of 12 * minimum monthly repayments a year. No inflation changes as mortgage stays the same for duration.

• Plus on-costs as a % of mortgage cost, increasing in line with inflation each year.

Cost of renting is calculated as:

• Weekly rent * 52 weeks a year, rising by a rental growth rate (which has been higher than inflation in many cities).

2. Excluding deposit and stamp duty: when does renting cost more than owning in total?

Calculated as the cumulative sum of owning versus the cumulative sum of renting each year.

3. Including deposit and stamp duty: when does renting cost more than owning in total?

As for #2 above, with the addition of the stamp duty and deposit into Year 1's ownership cost.

4. If you rented and invested the difference in shares, what would the shares and income from them be worth at each of the points above?

This is calculated as:

• Stamp duty and deposit invested in shares at start of Year 1

• Difference between annual cost of owning versus annual cost of renting put into shares until annual cost of renting overtakes owning, at end of each year.

• Applying growth rate of Australian shares (9.2 per cent according to Morningstar for 1993 to 2023)

A model is only as good as its assumptions

I've included data and estimates that matches a scenario I was assessing.

They might not be right for your situation. For example, the 7.75% rent growth is for Sydney over the last 20 years. Not every city has had the same level of growth.

Please look at those assumptions closely and update them if they don't suit your case.

Sneak peek

If you’re wondering what the downloadable looks like, here’s some screenshots:

The example I’ve used in these screenshots is this property. I chose it because it lists both a sale and market rent price (and Carlingford is one suburb in Sydney I know!)

This is the first version of the sheet. I’ll work on adding options like changing loan term from 30 years, increasing monthly repayment above the minimum, and having an offset account over time.

If you found it useful, or you have questions/suggestions, please leave a comment - I love to read them :)

About Money School

If you’re new here, welcome! Delighted to have you 😁

This is the blog for Money School, an Australian financial education company.

The main site is at https://www.moneyschool.org.au, but I keep our articles over here on beehiiv.

Everything on the main site and this blog is for educational purposes only. I’m not a financial adviser, nor do I play one on Netflix. I aim to help you learn about money so you can ‘choose your own adventure’.

Money School was co-founded in 2010 by me (Lacey Filipich) and my mother, Fran White. Money School offers workshops, online courses and have an international award-winning book, published with Penguin Life in 2020.

I’m also a regular media commentator on all things personal finance. If you’ve got 16 minutes to spare, you might like to check out my TEDx talk (over 1m views!) on financial independence and mini-retirements.