Should I buy or should I rent?

[sjkpark]

Hullo,

Advice needed.

Here is my situation:
Aucklander now living in Christchurch. Like Christchurch better and hoping to stay for at least 2 years. But single, early 30s, and don't really know where I will settle long term.

- Bought my first property in Mairangi Bay/Windsor Park, Auckland for $485k with $388k in mortgage in 2009. Currently being rented for $505/week. In LTC. On 4.85% for 1-year (interest only). Pays for itself.
- Bought my second property in Fendalton in Christchurch for $530k with $395k in mortgage earlier this year. (I know it wasn't a good deal, but not a terrible deal either.) Mixture of revolving credit, 4.85% P&I, and floating at 5% (which I am thinking of changing to revolving credit). Parents also gave me interest-free loan of $280k, which is sitting in the revolving credit. So effective mortgage at the mo is $115k. They may want to use part of the money in the near future but not all of it. The property is currently being rented for $550/week.

- Overall, approximately 75% LVR (on a very conservative estimate, not including the loan from parents)

Now I'm living in a rental myself, but I want to move out of this place early next year at the latest. I was initially wanting to move into Fendalton property that I own, but now thinking it might be too big for me. So options are:
1. Move into Fendalton property.
2. Rent a smaller property that's around $400/week and hope that landlord decides to hold, not sell.
3. Buy another, smaller property for me to live in.

Any ideas? I was thinking about buying a 2-2.5 bedroom unit in good neighbourhood for around $350k to live, but I guess you can't always guarantee that mortgage rate would stay this low. And taking on too much debt is quite scary. But potentially having to move 2 more times before a big exam that I'm supposed to sit in 2015 is also not very appealing.

I want to hear a range of opinions, especially from Cantabs.

S

[DazRaz]

Two years is a short time for a property investment. $350K is a lot to spend on a two bed unit.

Personally, I think the Christchurch property prices are artificially high and once homeowners are repaired and back in their homes rent levels and property prices will stagnate for some time. If you are looking at a longer time, then it would probably be ok but with the market at a high point, is it the time to buy?

[Wayne]

Personally, I think the Christchurch property prices are artificially high and once homeowners are repaired and back in their homes rent levels and property prices will stagnate for some time. If you are looking at a longer time, then it would probably be ok but with the market at a high point, is it the time to buy?

I wonder this also - I don't think the new high will stick past the rebuild. But the rebuild will take quite a while.

[Rentex]

Am not really familiar with Christchurch market so taking that into account...
Moving into your own home Fendalton with flatmates an option? Might as well pay your accommodation money towards your own properties than someone else's mortgage.

Also as/if extra money comes in can pay extra down on floating/flexi loan above required payments. Saving interest and building capital for next investment..
Then when/if decide to move out, reassess and maybe rent out (taking into account potential downtime in rent and/or being flexible with tenant start dates..)

Extra debt = extra leverage and capital gains on banks money but with the extra stress.

[sjkpark]

Mortgage = stress
Flatmates = could be equally or if not more stressful

[jenni_nextplace]

Buy if you can, you can always rent it out down the track if your situ changes.

[SlyAnimal]

I'm not an accountant, and so might have some of the below relationships vastly incorrect, so please correct me if I'm wrong, as I'd hate to mislead people, however..... here's a different way of thinking about things, and might help with your dilemma.....

If you rent somewhere, you're paying your rent with money which has already been taxed, whereas if you rent out a property, the rent that the tenants are paying you, hasn't been taxed yet. And it's not really fair to compare after tax income, against pre tax income.

Therefore, think of $400 after tax income, as $600 pre tax income ($600 @ 33% tax = roughly $400).

However, consider, that if you are renting out a property, the expenses for that property, including mortgage interest, are then tax deductible. Therefore all of your expenses/interest, are going to be 33% less (Or whatever the top tax bracket which you fall into is).

If you think about your situation, with the above in mind, it might assist you with putting a "real" monetary figure on each option, from which you could weigh up your personal preference, against the opportunity cost of each decision. Although when it comes down to it, both options 1 and 2 are probably quite similar cost wise, and will largely come down to personal preference.

Without crunching numbers, I'd say that the option someone suggested above, of living in your house + getting in flatmates, is probably the best option from a monetary sense (Although perhaps not a preferred option).

And I would say don't look too much into option 3. As you'd be overextending yourself financially (You already owe around $800k, on $1M worth of property, another $300-500k loan on top would be putting yourself in a dangerous position), and you'd probably buying based on personal preference, rather than investment potential, which might lead you into paying more for a property than you should, simply because you "want" to live there. Not to mention, that with just 2x rental properties, and that amount of finance, a small mishap could put you in a very financially hazardous position.

[sjkpark]

Thank you for your perspective SlyAnimal - never thought of it that way!

[sjkpark]

I did some calculation in the light of SlyAnimal's post:

Cost of renting @ $400/week vs cost of living in own home (which is currently being rented @ $550, but I think it is being over-rented cos I let them have a dog). This is calculated on 6% mortgage rate.

Renting:
$10,370 if my effective mortgage stays at $95000 (i.e, parents don't withdraw their money)
$14,374 if effective mortgage goes up to $195000 (i.e, parents withdraw $100,000, which they may have to do)

Moving into own home:
$10,800 with $95000 mortgage
$16,800 with $195000 mortgage

This is actually quite surprising! Bear in mind my own house is better than anything I can get for $400/week in Christchurch! Also, because the mortgage interest is the biggest expense for most IPs, I would save MORE if mortgage interest rate stays lower than 6%, and if I can get the mortgage lower than $95000, which I am confident I can do!

Thank you so much everyone!

[Rentex]

Good to see the figures confirming. Thanks for posting.

[sjkpark]

OMG.... http://www.harcourts.co.nz/Property/...10b-Parr-Place
Sold for $470,000. $130,000 above CV.
Glad that I bought one back in January.

Will wait for the next price correction...