The Pros and Cons of Buying versus Renting

October 14, 2010

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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.

The 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.

8. Joy of home ownership

It’s 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.

The disadvantages of buying

1. Transaction costs

When you buy you have to pay stamp duty (up to 3% 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% for you to break even.

2. Holdings 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.

4. 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.

5. 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.

6. Financial and psychological burden of having a mortgage

I’ve found that for many people when they realize 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 have deleterious effects on 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?”

Can you think of other reasons to or not to buy? Please leave them in the comments!

by Propwise.sg on October 14, 2010 · 21 comments

Posted in Buying Singapore Property,Renting in Singapore,Singapore Property Beginner’s Guide

{ 14 comments… read them below or add one }

David December 5, 2010 at 12:44 am

I have the opportunity to argue the same ideas are mention above with my wife. Fortunately I followed her advise and bought a hdb during the 2000 crisis and now my property appreciate 100% and more. But unfortunately currently having problem finding a new home. Would seek your recent articles on the cheapest hdb in Singapore on the outskirts. Looking at Boon Lay as have relatives up north.

Keep it up.
Regards
David

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Bryan Norman May 6, 2011 at 9:49 am

That’s the crux of the matter isn’t it? It seems that even when you buy at the right time, you don’t really gain much. After all, the home you bought when prices were low may now have appreciated by 100%, but as they say, during high tide *all* ships in the harbor are raised, not just yours.

In all likelihood your windfall will be eaten up by the higher price of the new home you’re aiming to buy.

One idea would be to sell at peak, pocket the profit and then move to Malaysia, either to rent or buy. Granted not everyone is able to hop across so easily, but keep in mind that you’ll be back after propery prices are back to more acceptable levels.

Time it right ans you’ll be able to buy a new place and have plenty of cash left over.

Back to square one.

Then

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Mary July 7, 2011 at 5:20 pm

The Pros and Cons of Buying versus Renting.

The question I would like to ask is How about renting instead of buying in anticipation of a crash in the property market in say 2 or 3 years time? Would it make more sense to rent or buy?

Thanks

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Propwise.sg March 12, 2012 at 8:36 pm

Hi Mary, that all depends on your view of the market. If you think that the market is going to crash in the next couple of years, then you may consider doing so. In general though, I do not recommend that most people do this as this can create a huge inconvenience for your family if they have to keep moving house.

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Vik March 9, 2012 at 6:18 pm

Nothing in this post is what anyone with a normal awareness of one’s environment would not know. Hence it is not of much value.

What would be nice is this: the author could provide an opinion. E.g. Say, “in the current scenario I would rent and see where the market goes in the next 18 months”; or whatever his or her opinion might be.

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Propwise.sg March 12, 2012 at 8:38 pm

Hi Vik, thanks for your feedback. This article is more a foundation article to help people think about this subject, and does not contain market views which will obviously become dated with time. For the latest market views please check the recent posts at http://www.propwise.sg.

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Gaby April 12, 2012 at 3:45 pm

I like your article but find it not detailed enough. It also sounds a little discouraging to “buy” than to “rent”. The buyer has to buy within his means and be prepared for a hike in interests rates as well as buy a property that is well kept to reduce maintenance costs. Even if the property goes down in value it will always come up. The property market is cyclical. Emotional buying is not advisable but a certain amount of courage and confidence is needed to buy property.

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Triz May 17, 2012 at 12:02 am

This article effectively remind anyone who is currently thinking of buying a property to sit back & think rationally & objectively, rather than making an emotional decision to purchase a property where it can become a financial burden one day.

As the property price is currently on the high side, am not sure if it’s all-time high in our singapore property history, but some people may still be tempted to jump in to purchase as they are worried the price will go up further as well as to fulfill their “dream” of owning a property, this may be an emotional decision rather than rational/objective decision.

Although there are many signs indicationg property sales, especially private properties has slowed down & stagnant, but it would great if the author could give a clearer picture of future market direction based on passed economic cycle & property price trend as I think this is ” burning question” many readers, including myself will ask when trying to thinks rationally.

Thank you

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Kamal June 1, 2012 at 7:19 pm

Im currently renting a terrace in JB and staying there with my mum as im very scared to purchase a HDB at the moment. 27 n single and couldnt get a HDB loan plus reading the ‘disadvantage of buying’ makes me wonder whether its better for me to buy a house in JB. Nearly everything is cheaper there and i remember getting my 1st electrical and water bill and thinking it must be a joke. Surprising there are ALOT of Singaporeans renting out their flats in sg and staying in JB. As for me, i don’t get to gain any rental yield and have to stay very far away from my relative and friends. But then again staying there is definitely much better than to rent just one HDB room in SG which is the same price of a two storey terrace. I know i can still buy a house if I ask my mum to be occupier but i have to take up bank loan which until now i dun understand the “sibor/sor” or why i have “to top up cash the difference in cash if asset falls”. Ive heard new flat owners will be very greatly affected if the market crashes so thats why i didnt want to buy. Ive also been advise to quickly buy a house as the prices will not decrease and also since my mum is still with me. So im really very confused.

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Propwise.sg June 4, 2012 at 10:28 pm

Hi Kamal, I suggest that you learn as much as you can about the property market before you buy a property. To get started, you can just read through all the old posts on this blog. They answer some of the concerns that you have.

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Michael Tan June 8, 2012 at 4:25 pm

Looking at most of the writer are also looking for buy first sell later or sell first buy back later, hoping to save some money on buying or making a profit on selling. So both ways are correct. Its only the timing of buying or selling at the right time. Let me tell you guy a story, 3 years ago when every one shout that the property prices is very high, some of my friends sell there semi-D and high class condo, and go to rent a house to stay, thinking that the prices will come down, but last month I meet them and ask how about wether he is going to buy back a house for his own stay. He said that with the money he pocket from the sales, cannot buy back the same kind of house. And another 1 friend just buy a condo at the same time 2009 even when some of his friends and family telling him not to buy as the prices is already double. So you guy should know he is now sitting on 35% gain from his purchase or 175% of his capital investment.
So NO ONE dare to give you guy an anwser to buy or to sell, it’s just that you had to be comfortable of what you want. And don’t need to blame who ever is making the dission. And other way is that you buy more then 1 house so when the prices is very high and you think is a good sell, so sell and make the money. But for my own dission is I will keep on buying so long, when I had save enough money for 20 to 40 % of the down payment. And rent it out to earn passive income.
Good Luck To Every Property Owner and Buyer. Cheers!!!!!!!!!!

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Propwise.sg June 14, 2012 at 9:47 pm

Hi Michael, thanks for your comment! Yes sometimes you can be too “smart” trying to time the market…

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David Tan July 27, 2012 at 7:30 pm

Hi pls advise me is it wise to pay housing loan as fast as possible as I have tenanted out

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Propwise.sg July 31, 2012 at 9:36 pm

Hi David, in general a housing loan is the cheapest loan you can get, so if you have any other higher interest loans (e.g. credit card, car etc) you should pay off those first. Or if you are able to invest that money and get a higher return, you do not have to rush to pay it off.

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