Sunday, December 4, 2011

Rent Money is Dead Money - part 2

This is a note from a reader, in response to the prior Rent Money is Dead Money post.

Here’s an actual position scenario sent in by a reader in support of the report “RENT MONEY IS DEAD MONEY” that is, is it better financially to rent than own an apartment. The figures quoted here are actual, dated within the last 6 months. The apartment is a 2 bedroom in Newstead, approx 12 years old with good partial views of the river, 1 car parking, in a well managed complex.

Cost of Ownership VS Renting the same apartment. (round dollars)
Most recent sale price = $650,000 (2 years ago were selling for $725,000 to $795,000)

Rates                                  $2060 p/a
Water & Sewage              $804 p/a
Insurance                           $480 (personal property) p/a
Corp Body                          $4169 pa
Sinking Fund                     ??
Extra Levy                          ??

Total cost of Ownership $7513 /12 months =$626.00 p/m

Loss of Interest on capital ($650,000 @ 6.11%)  = $39,715 pa /12  = $3,309 p/m
Total cost to buy outright for cash  = ($3,309 + $626) = $3925 p/m
Other: At present, is a depreciating asset while ownership costs continue to rise.

Rent paid  = $2100 p/m  = $25,200 p/a
Still have $650,000 in bank earning $39,715 pa (Bankwest, citbank, ING, ANZ (6%) et al online saver accounts, immediate access to funds)
Other: Property prices continue to fall, and may fall further in 2012 = no depreciating asset to carry.
Flexibility to buy if/when prices fall further. 
No responsibility other than taking good care of the property and paying rent on time.
COST TO RENT  = $25,200

To own = loss of $1825 p/m x 12 = $21,900 p/a worse off owning a depreciating asset, just to say you own it. ($47,100 -$25,200 (rent) = $21,900). Who would want to own one with a loss like that!
I’m better off renting than buying AND still have liquid cash in bank. Therefore, with my money in the bank, I’m $21,900 a year better off renting.
To equal the return I get from the bank for the same money it would cost me to buy into these units, the unit would need to be priced at $427,000. Therefore, the real price of these units is $427,000. At $650,000, they are grossly overpriced, as we all know. $427,000 is the real value of these units.

And to the critics, don’t mention inflation  - I don’t believe in it over a short term 2-4 years. If you insist upon mentioning inflation, I’ll raise you a clear hand with “depreciating property prices”, 10 times the loss of inflation in just 18 months or “CGT” later or Negative Gearing (surely you’ve lost enough already without NG!).

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