Should you buy or rent?

By Mr. Propwise (courtesy of PropertyGuru)

Home ownership is a big deal for Singaporeans. The most critical part of the 5 Cs in the Singapore Dream is the one that stands for Condo (the other four being Cash, Car, Credit Card and Career).

Thus buying a home is often an emotional decision rather than a rational one, sometimes with financially distressing consequences. To make a better decision, you should consider the pros and cons of buying a property.

Advantages of buying

1) Capital appreciation

Your home may go up in value, boosting your net worth and earning you a profit when you sell it.

2) Building equity

Rather than paying rent to a landlord which becomes an expense, by buying a place, your mortgage payments are helping you build equity (once you subtract the interest payments) in your own property.

3) Rental yield

If you are buying a property for investment, you can rent out the property and get a rental yield. Even if you are staying in it, you can rent out a room to get some income.

4) Hedge against inflation

During times of inflation, the purchasing power of money gets eroded, whereas hard assets (e.g. gold, property) tend to keep their value and rise in tandem.

5) Ability to leverage

Leverage magnifies your returns if the price goes up, but it also magnifies your losses if it goes down. Leverage also allows you to buy a more expensive place than you would have been able to without it.

6) Ability to make capital improvements to enhance value

When you buy a place, you can renovate it (e.g. by painting it, or changing the fittings) to raise the value of your property. Contrast this to buying stocks where you are a passive investor (unless you own a significant percentage of the company).

7) Tax savings

When you sell your property and make a profit, there is typically no capital gains tax (unless you are deemed to be a property trader by the IRAS). Also, the portion of your CPF that you use to make your mortgage payments is tax-free, while rent payments come from your post-tax income.

It’s also nice to have a roof over your head that belongs to you. There’s no need to worry about a landlord raising your rent, or chasing you out.

Disadvantages of buying

1) Transaction costs

When you buy, you have to pay stamp duty (up to 3 percent of the purchase price). And don’t forget the lawyer’s fee and other administrative expenses. When you sell, there may also be stamp duty (if you sell within three years), the agent’s fee etc. As a rule of thumb, the property price has to rise by around 5 percent for you to break even.

2) Holding costs

When you own a property, you suddenly find you have more bills to pay – maintenance fees, property tax etc.

3) Have to deal with home repairs

If you are renting most of the time, when something breaks down, you can call the landlord and get him to deal with it. As an owner, you have to deal with it yourself.

5) Less liquidity

Unlike a stock which you can buy and sell immediately and get your cash within a few days, selling a home and completing the sale can take several months or more.

6) Exposed to falling asset prices and rising rates

Remember the leverage mentioned above? If prices are falling, your equity in the house will fall even faster. And if you are in a negative equity situation, the bank may even ask you to top up the difference in cash. This could be devastating financially. Also, if interest rates rise, your monthly mortgage payments could rise as well (especially if they are pegged to SIBOR/SOR), causing stress on your monthly cash flow situation.

7) Financial and psychological burden of having a mortgage

I’ve found that for many people, when they realise they have to service their mortgage payment every month for the next few decades, it becomes an emotional burden and they become much more risk averse. So they would think twice about switching jobs (even for a better opportunity), starting a business, investing, or doing other things that could be risky in the short term but have a long term benefit to their lives. Also, they tend to feel more stressed out in general from the large financial commitment, and this could affect their health.

So before you commit to a home purchase, carefully consider the above list of advantages and disadvantages of buying, and ask yourself: “Is buying a home really the best option for me?”

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