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To Rent or Buy a Home?

The Motley Fool logo The Motley Fool 13/9/2017 Jeremy Chia

The consensus among Singaporeans used to be that everyone should save enough money to buy a home. This is because of the widely believed view that renting is throwing away your money, as you get no equity in return.

However, this may not tell the whole truth. With the property cooling measures in place, and the availability of new assets to invest in, renting may not be such a bad idea.

In this three-part series, I will look holistically into this debate.

In the first part, I described the pros and cons of buying a home.

In this article, I will take a more detailed look at why we should not overlook renting as an option.

Finally, in the third and final article, I will highlight the most common factors that we should consider before making one of the most important financial decisions of our lives.

Why rent?

Most Singaporeans I have talked to would rather stay with their parents than move out to rent a property. This makes a lot of sense financially as it is cheap and why not leverage on your parents who happen to have a spare room available for you?

However, not everyone is as lucky. Some people may have no rooms waiting for them at their parent’s place, making them either rent a home or buy one. Or some may choose to move out as a lifestyle choice. So which is the better option? Here are a few reasons for renting a home.

  • Low capital outlay

This may be the only available option to those who do not have the means to pay a down payment or secure a home loan.

  • Free up capital and liquidity

Related to the point above, a renter has more capital left over to invest. For savvy investors, this is especially important as they can make their money work harder for them.

  • Need not worry about home prices and interest rate changes

Being free of mortgage, renters are not held ransom to interest rate changes or home price fluctuations.

  • No additional maintenance or management expense

Thankfully for renters, landlords usually cover the management and maintenance expense for the property.

  • Other non-financial benefits

Renters have the flexibility to relocate and can have short-term contracts, depending on requirement.

  Disadvantage of renting

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On the flipside, there are some downsides to renting.

  • Rental cost does not contribute to equity

Unlike paying your monthly mortgage, the rental cost does not give you equity in the property. This is the reason why Singaporeans may consider it a waste of money. However, it is important to note that in exchange for the rental cost, renters are getting a home to stay in.

  • Your rent may grow in the future

Unlike paying for your mortgage, which is fixed, rent tends to increase from year to year.

  • No tax benefit and cannot use CPF to pay for rent

Another major downside of renting is that renters do not get a tax benefit and are not able to use their CPF to pay for rent to free up liquidity.

  • Other non-financial disadvantages

Renters are held hostage to the whims and standards set by landlords. They also have less privacy or flexibility to change the home's appearance as and when they wish. Renters may also not benefit from the status appeal of owning a property.

The Foolish bottom line

Renting has had a bad reputation in Singapore as most people believe that it is equivalent to throwing away money. However, there are many other aspects to the arguments for renting that may have been overlooked.

Before deciding whether one should buy or rent a home, we should be familiar with all facets of the argument. This includes both financial and non-financial reasons. My final part of the series will analyse how an individual should look at the problem before making a better decision in the future.

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