In countries where renting is a popular choice, the majority will live in a rental apartment or house lifelong. There is the stability of rental expenses and lease period. For example, around 60% of the population rent in Switzerland, so 40% own homes. However, around 91% of the population own homes in Singapore. The big difference is a result of the cost of owning vs. the cost of renting.

Cost of owning

Besides the purchase price, the costs (and savings) associated with owning a property are

• Interest payment. If you borrow money from the bank, aka having a mortgage, you pay interest to the bank. This is a cost to you as the money will not come back to your pocket. That is why a lower interest rate is much preferred.

• Tax saved from the interest payment. In many countries, the interest payment is tax-deductible, which means this part of your income is not subjected to income tax. If your yearly interest is $6000, and your marginal tax rate is 30%, then you save 30% X $6000=$1800 on tax. You can treat it as your net interest payment is $6000 – $1800 = $4200.

• Interest rate risk. If you secured a low-interest rate for your mortgage, you are lucky. But no one knows what will it be in 10,20 years’ time. If when your mortgage expired and you need a new one, the interest rate could be much higher than before, then your yearly payment sum will be much bigger. a 1% interest rate on a $400,000 loan is $4000 per year. but a 3% interest rate on a $200,000 loan is $6000 per year. It is a risk many people have not thought of. So prepare for it.

• Maintenance expenses to keep your property in good condition. You never know what could happen with your house or apartment, there could be a leaking problem, termite problem, renovation of the roof, renovation of the kitchen, replacement of some appliances, and so on. Those are what we have experienced in the past. You better save aside 1-2% of the housing value as a maintenance fund.

• Tax on the property: in some countries, it is called property tax. It is not that you can afford to buy a house, but you also need to see if you can afford to pay the property tax every single year! In the US the nationwide average property tax is 1.1%. A house costs $500,000 to buy, but every year you have to pay $5500 on property tax. In Switzerland there is no property tax but a wealth tax (asset tax), it taxes you on the total asset value you have. On top of that, there is an assumed rental income to be added to your taxable income tax. Imagine you own an apartment, the local authority will do an evaluation of how much rental income will you receive if you were rented it out. Usually, they use 60 -70% (depends on the canton) of the market rental price to compute this ‘imaginable rental income’. As a result, you pay more income tax.

• Opportunity cost: if you use a large sum for the downpayment, this sum could be earning your profit in the market money. Hence it is an opportunity cost for those who will invest if not buying. Simply put you have $100,000 cash on hand, you can either invest them in an ETF or buy a property. If you use the money to buy a property, you forego the potential earnings of x% each year if you had invested them. If you don’t invest anyway, then there is no opportunity cost to you.

• Transaction costs when you purchase or sell it. Each time you buy and sell it, you incur 5% or more transaction costs from the notary, broker fees, title transfer, and so on. It is not a small sum depends on your property value. Sometimes the cost of the transaction could be much higher depends on where you live.

• Tax on the profit when you resell it at a higher price. In the US and Switzerland, and many other countries, you need to pay tax on the gains you made from reselling your property. The tax rate is hefty. In Switzerland, the tax rate gradually decreases over the years you are living inside. If you resell it after one year, it is definitely heavily taxed. But again, if you buy another property, you don’t pay the tax now, you some how ‘carried over’ to the next property. It is deferred. In Singapore, there is no capital gain tax which is great.

Gains of owning

• Peace of mind: we all long for security, the security of a place to live. By owning your own property, you are protected from unforeseeable forces such as rental increase, selling of the apartment, change of owners.

• Make it your own. You can drill as many holes on the wall as you like, you can remodel the kitchen the way you want it. When you own a property, you can make it the way you wanted it.

• Property appreciation: If you borrow money from the bank and buy a property, you are using leverage so the return will be much higher since your initial investment is much less than the value of the property. If your apartment’s market price is at $500,000, a 2% value increase will give you $20,000 unrealized gain, if the downpayment you put in is $100,000, the unrealized return is 20%. That is the power of leverage.

• Hegde against old times. If you own your own property, when you retired and have no source of income as before, you will be at peace as you have a place to live. By then you most likely have paid off your mortgage or left with little to be paid back. In Singapore, the government requires a double retirement sum in the retirement account for those who don’t own a property.

Other considerations

In our YouTube session, Matthias has highlighted that if you are going to live somewhere for 7 years or more, it is advisable to buy. Remember it is not absolute, you need to do your own calculations. It is only a general recommendation.

what are other considerations?

• Flexibility: do you need the flexibility at the moment? Maybe you change jobs, change cities to live, change of family size and needs?

• Location: do you need to be close to your workplace, do you need to be close to where a school is, or do you want to be close to where your family is?

• Tax: if your earning is not huge, it might worth living in a higher tax but low rent area. If your earning increases over the years, you can consider a move to a low tax and higher rent area. This is especially true in Switzerland, each canton and city/village has its own tax rate.

• Lifestyle: do you want to be in the city center and be close to all amenities? or do you prefer to live in the quiet countryside to be close to nature? Our lifestyles can change at different ages, if you are not sure what you want in the future, it is better to stay flexible.

• Repairs. When you rent, it is easy, if something is broken in the apartment, you can inform your landlord. If you own a property, you have to bear all the costs yourself. Do you want the hassle or convenience?

Cost of renting

• Rents. This is a pure cost. What you pay is money out of your pocket. But you can control how much you pay or how much you should pay. Read this article <Why You Might Spend Too Much on Housing and How to Reduce Your Housing Cost>.

Gains of renting

• Investment return: if you have extra savings and you want to keep renting. You can invest your savings in the money market such as the S&P500 ETF. In the last 10 years, it generates an average 13.44% annual return. Not only the S&P500 ETF, so does many other index-tracking ETFs. For more information on investing, go to <How To Build An Investment Portfolio>.

• Flexibility: you can choose to live nearby the workplace which saves your time and money on transportation. you can choose to move to another city for a new job. you can choose to live in a bigger apartment when your family size grows. Renting provides so much flexibility.

Why renting

By answering the above questions, you might find that renting is a great option for those who need the flexibility. When you are not sure what changes come to your life, it is better to stay flexible. If you know that you are going to live in this city for the next 7, 10, or more years, it is financially better when you own a property and protect yourself against inflation and hedge for old times. What matters is the scale of the costs and savings, if your rent is extremely cheap and housing prices are very high, maybe you are happy with the rental solution.

The conclusion is, it depends on your personal situation to decide rent or buy. But you can use what we discussed above to find out the cost of buying vs. renting and make an informed decision.

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