Renting a home can be a savvy decision

[cyclone]

Renting a home can be a savvy decision
You can't call a home you live in an asset, and that down payment could be put to better use

by Lee Xin En
Published May 21, 2017

After two years living abroad - the last six months in a beautiful but mouse-infested house in hipster East London - I was over the moon to be back in Singapore.

I relished my parents' clean flat, the gym downstairs and my mother's delicious home-cooked meals.

Still, after a month or two, I was keen to move out as my place in the suburbs is over an hour's commute to the office. I had also enjoyed living downtown abroad, which I feel is the best way to fully appreciate a cosmopolitan and vibrant city.

However, family, friends and acquaintances were downright hostile to the idea of renting a place.

"You're throwing money down the drain," was a common refrain, while many emphasised that I should consider home ownership as I would "at least own something" at the end of 20 or 30 years.

I am intrigued by the deeply entrenched idea that renting a home is a poor financial decision akin to "throwing away money".

More details in http://www.straitstimes.com/business/pro...y-decision

[specuvestor]

In my view there is basically 3 types of assets:

1) Cash flow driven asset as per the article. That's why consistent dividend stocks command higher PE. You put in one cash flow and derives multiple cash flow. This is generally what Buffett looks for, and focus is on payback period ie Return of Capital.

2) Price appreciation asset which is the primary residence the article is not so keen on. As per my previous posts, due to high leverage from mortgage loan, long holding period and the inherent inflationary nature of economies, most people have positive experience with properties. In stocks, actually most people are looking at these kind of return

3) Accounting or Financial assets which are actually capitalised expense due to the huge sum, or depreciating assets with market value. For example maintenance capex, renovations or diamonds etc belongs to this category. Sometimes distress or cigar butts investing belongs to this where the company or business is declining but stripping out the declining asset is worth more than market value

That said, sometimes it's not so clear cut. A car can be either 1) because it helps generate sales for a salesman or uber driver or 3) when it is for personal use. Gold, painting etc belongs to 2) but Gold can be lent out and becomes 1) so how you structure the asset will have a difference

There are of course other intangibles like mobility, aspirations and quality of life etc that can be burdened by property debt etc. It's not always so mathematical.

[Duskerdawn]

In my view there is basically 3 types of assets:

1) Cash flow driven asset as per the article. That's why consistent dividend stocks command higher PE. You put in one cash flow and derives multiple cash flow. This is generally what Buffett looks for, and focus is on payback period ie Return of Capital.

2) Price appreciation asset which is the primary residence the article is not so keen on. As per my previous posts, due to high leverage from mortgage loan, long holding period and the inherent inflationary nature of economies, most people have positive experience with properties. In stocks, actually most people are looking at these kind of return

3) Accounting or Financial assets which are actually capitalised expense due to the huge sum, or depreciating assets with market value. For example maintenance capex, renovations or diamonds etc belongs to this category. Sometimes distress or cigar butts investing belongs to this where the company or business is declining but stripping out the declining asset is worth more than market value

That said, sometimes it's not so clear cut. A car can be either 1) because it helps generate sales for a salesman or uber driver or 3) when it is for personal use. Gold, painting etc belongs to 2) but Gold can be lent out and becomes 1) so how you structure the asset will have a difference

There are of course other intangibles like mobility, aspirations and quality of life etc that can be burdened by property debt etc. It's not always so mathematical.

It is just perception and our education system that makes us think that home ownership is necessary. 

My view is that it is generally better to buy when point 2 occurs, price appreciation. However, if you have the view that property prices are unlikely to grow over the period of ownership you should seriously consider renting. 

For those interested on the calculations please refer to the calculator that "The New York Times" created to guide people on the mathematics behind Renting vs Buying a property.
"https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0"

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Just my 2 cents, I think property prices are still relatively high in Singapore. On the other hand, due to surplus in number of properties in Singapore, the rental rates in Singapore relatively low. Additionally, the education system focuses on the greatness of a nation with high home ownership and a fixed mentality that rental is a waste of money. The rental rate for a couple of properties will remain lower comparative to the prices. 

Do note that most Singaporeans would have CPF which automatically forces us to purchase a home. CPF is probably the number one reason people purchase their homes over renting. To tide down and reduce monthly cash outflows, most individuals would utilize their CPF. This is also the very reason I believe the prices of housing in Singapore are high. (I do not think it is artificial, since CPF will not be removed.) CPF rate increase coupled with GDP growth and population growth were the main reasons that property prices have drastically increased over the past 40 years.
(Please refer to this website for CPF rates from 1955 -1982: http://www.nas.gov.sg/archivesonline/dat...21031s.pdf  & CPF rates from 1985 to 2013: http://graphics.straitstimes.com/STI/STI...rates.html
GDP: http://www.tradingeconomics.com/singapore/gdp 
Property prices: http://www.tradingeconomics.com/singapore/housing-index)

With that in mind, there are many opportunities where rental is a lot better than purchasing a home, however you will still have to do your own calculations. Every situation is different, different holding periods, different cash flows, access to different interest rates, these amongst other factors will lead you to different conclusions for whether to buy a home.

[specuvestor]

Actually I forgot to add the below so to have some sense of relevance to the topic

A property can be 1) if the net rental yield is sufficient for a reasonable payback period or 2) for people who just buy because of scarcity value etc and can't be bothered to rent out like some sentosa cove properties, or 3) because sometimes we forget it is usually L99. As I remarked in another post, usually the discount factor overwhelms a say 4% CAGR appreciation sometime around year 67. It will be instructive to see what HDB will do to the old HDB flats reaching that stage, whether they will play ball to maintain the current perception of appreciating home prices, with corresponding political consequences.

The psychology is actually quite similar to buy term invest the rest, or buy life.