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Why renting is not dead money
Classic Property Myth number 1: "Rent is dead money"
As with all the classic property myths "rent is dead money" has at its core an element of truth that has allowed it to survive through the years. Yet it deserves its myth status because it is simply not always true. This article sets out to demonstrate how in the current economic climate you should not consider renting dead money but a financially astute decision.
When renting is a better investment
The general rule of thumb is that renting a property is a better investment than buying it when two conditions are met;
- The cost to rent is cheaper than the cost of the mortgage interest plus maintenance on that property
- Property prices are static or falling
To understand how this works we have to consider the two components of buying a property that can make it a good investment;
- The value of the property may rise and you will make money if you sell the property
- Your mortgage repayment is ultimately paying off the cost of the property so that you will own it
Now it's pretty easy to see why in a static or falling property market item 1 does not hold true. Indeed in a falling market owning a property can actually become a liability likely to put you into negative equity (see forthcoming article on the perils of Negative Equity).
Item 2 is a little bit more complicated. The way this works is that if you are paying less rent than you would be paying out servicing the cost of the loan and property upkeep you will be able to save more money aside. Those savings would be more than would have paid off from the amount that you owed on your mortgage leaving you ahead.
Renting in action
Consider this true case example which reflects the current living situation of the author:
| Property:
| Two bedroomed flat |
| Value to buy:
|