How to get off the rental rut

Jason Fritsch - First Home Owner at 18 years old

Jason Fritsch - first home owner at 18 years old!

I know of quite a few renters, mostly young X & Y generation youths with good paying jobs who simply can’t put together a deposit towards a first home. They have been renting for years either by themselves or share a house or apartment with friends and split the weekly rent among themselves. Not a bad proposition since it becomes relatively cheaper than being bogged down by a huge mortgage even though it means sacrificing privacy at times. There are both pros and cons with this arrangement and I will start with the good:

Pros of renting vs owning a home

  • The most obvious is not having the burden and responsibility of a mortgage each month and therefore, more disposable income, especially if a few friends share the weekly rent.
  • Long term renters can sometimes negotiate good rental rates from some landlords who value stability over a few extra dollars in rental income.
  • Renters do not need to pay for all the incidental costs that come with owning a home such as water and council rates, insurance, management fees, repairs and maintenance of property.
  • Renters do not need to worry about not being able to find good tenants and having an investment property vacant whilst having to service monthly mortgage payments or having to contend with bad tenants who may trash their property and not pay rent on time or at all.
  • Some renters seek out lifestyle properties as a matter of choice, such as a beachfront mansion or a large home in the country side which they can live in by paying relatively cheaper rent than trying to own such properties themselves.
  • There are also those who own their home but choose to rent to take advantage of tax benefits but these renters are not the focus of this article.
Tenants from hell!!

Tenants from hell - do you really need this??

Now for the bad news:

Cons of renting vs owning a home

  • Long term renters who rent not by choice, are  sometimes resigned to the fact that buying their own home may be out of their reach and see the weekly rent as just another bill they have to pay and become very comfortable with their renting situation. This eventually becomes a self-fulfilling prophecy of never having the need to own a home.
  • Generally, property prices trend upwards in the long run and in Australia, the current shortage of housing is seen by many to support long term price growth. This situation may not augur well for renters who do not put home ownership as a priority in their lives.
  • The housing shortage will also drive up rental rates and with a booming population, landlords are currently having the benefit to choose from many tenants applying for the same property to rent.
  • Renting obviously does not accord the same freedom to renters as owning your own home, such as installing fittings and having to abide by maintaining the property in good repair save for reasonable wear and tear.
  • Renting can sometimes be expensive and for some extra dollars, a mortgage may not be that far off for some renters, especially those who share rental premises.

The joy of home ownership

Getting in

To me, the most effective way to get into the property market for aspiring first home owners is to try and save for a deposit either with family help or friends and then, if necessary, buy the first property with friends if they are already renting together. Needless to say, friends who buy property together need to be “on the same page” in terms of personality, goals, financial capacity and long term commitment towards owning. By ditching the rent and sacrificing a little disposable income, it is not unrealistic for a few friends to pool resources and buy their first home.

There are also investors who have gone beyond owning their homes and are now pulling resources to buy lifestyle properties such as beach houses and holiday homes (See article below).

Ownership structure

If first home owners are sharing the burden of buying jointly with friends, the single most important consideration is ownership structure, that is whether the property is to be held as “joint tenants” or “tenants in common” and legislation differs in each state in Australia. The main difference if you own a property as joint tenants, you all own the property in equal shares and if one of the owners die, then their share will automatically pass to the surviving owner/s. Even a will cannot override a joint tenancy. This form of ownership is appropriate with married or long term defacto couples as it is often their wish that if one partner passes away, their share in the property goes to the surviving partner.

If you own a property as tenants in common, you can choose to own the property either in equal or unequal shares eg 50% / 50%, 20% / 80% or 30% / 35% / 35%. If one of the owners die, your will determines who gets your ownership as your proportion does not automatically go to the surviving owners. This form of ownership structure is more appropriate for friends who wish to pool resources, purchase and own property together.

As always, I would advise consulting a legal adviser and accountant to consider all the legal issues before jumping in and buying that first property with friends without fully understanding and being aware of all the legal and financial implications.

Summary

Of course, the pros and cons above are general reasons why some people may choose or not choose to rent. Indeed, I have come across renters who say they are so happy and comfortable with their rented premises, they really do not see any need to ever own their own home.

It brings us back to the question – “Why do I need to buy a property?” Therefore, I would advise any aspiring first home owner to carefully consider this question. Just as how some people choose not to drive, preferring public transport and hence not having the need to own a car at all, one may also find there is absolutely no necessity to buy a property, ever!

Some lucky renters have found their “dream rental property” and have grown to such a level of affinity to consider it their “home” or their “sanctuary”. They are perfectly happy to make  expensive decisions on decoration, furniture and furnishings which they would not otherwise be able to afford if they had to be paying a mortgage. This argument is well and good when it makes tenants as happy as owing their own home. Personally, I see home ownership as one of the most basic of one’s needs and livelihood. In Australia, 70% of people are either home owners or in the process of owning their home through a mortgage. Regardless of social status or background, one needs a roof over one’s head and I suspect that given a choice, the majority of us would choose owning over renting.

For more info and resources, visit our First Home Buyers section.

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