Hello, Mr. Graneau, and welcome to The New Australian. To say that owning a home in Australia is a hot button topic would be to put it lightly. Between the investors and the banks, many Australians are feeling screwed over by the system in one way or another. But you’re here today to give some hope to the renters (including myself) who have always thought owning a home to be the better investment.
Q: Thank you for joining me today. Before we begin, would you mind introducing yourself to the readers?
A: I was born in Dominica, a small island in the Caribbean with a population of roughly 70,000 people. At seventeen years old, my mother and I immigrated to the United States. At age twenty-five, I joined the military and spent fourteen years in the U.S. Navy. Most recently, I’ve spent roughly ten years as a financial management coach, conducting workshops and private consultations for people in the military, government agencies, and the civilian community. In 2005, I published my first book, Are You Financially Checkmate?, a project that took almost four years to complete.
Q: Can you briefly explain how owning your own home puts you on the losing side? Doesn’t it depend on where you live as to whether it’s better to rent or buy?
A: Housing is an expense we all must pay. The reward is the benefit of having a place to live we call home. Renters pay the monthly rent, some utilities, and no more. Home owners, on the other hand, approach the issue as an investment. They borrow money (the mortgage) to pay for the home and become legally responsible for the property. For the anticipated profit (the appreciated value on the home), they must pay the cost of the borrowed money (the interest on the loan), property tax, and home owner’s insurance. Over time, theses costs alone will wipe away any anticipated gain.
Meanwhile, they must maintain the property for sales appeal. When the cost of improvement, repairs, maintenance, and remodeling are brought into the equation, most home owners will walk away with a net zero percent return or less on the so called “investment.” In some case, it may appear that they made some money. But the apparent profit is minuscule compared to the money spent on the property during occupancy.
If these individuals had continued renting and decided to invest the extra money “wasted” on the home, the numbers show that they would be more profitable, potentially earning hundreds of thousands of dollars within the same period of home ownership. Thus, it goes without saying, why throw away the extra money on a home, when one can choose an ideal location to rent, with all the comfort and convenience of owning, and become wildly successful at the same time? All that’s required is a change of attitude.
Q: Australia is home to many ethnicities, some of which go by an older practice of home buying. A large group gets together, pools their resources and buys a house for one of the families. Then they save up and do the same again for the next family, and so on. Cash only, no loans needed. Is this a good way to get past the scam?
A: Yes. One of the most deceptive component of home buying is the mortgage. When this factor is removed from the home buying equation, there is a good chance for a profit. Though the owner will incur costs along the way such as property tax, home owner’s insurance, etc., the intrinsic value of the property will offset these costs to allow some gain.
There is a caveat to this option, however. The home owner should avoid taking loans (home equity line of credit, for example) against the property. Borrowed money collateralized on a residential property is counterproductive for the owner’s long-term, financial security.
Q: Another popular trend in Australia is to buy one block and build two houses, living in one and renting the other. Is the renter still the winner in this situation, or is this a possible defence against the scam?
A: This type of housing arrangement is creative, and it can be profitable, particularly if the property has no loans against it. But notice that the dynamics of the home ownership system have changed. Part of the property is commercialized, which gets into the investment aspect of real estate—a totally different set of circumstance, which Renters Win, Home Owners Lose intentionally avoided.
In any case, the one who rents the other half of the building still retains all the freedom, flexibility, and leverages of a renter. After paying rent and some utilities, all costs are passed onto the home owner, leaving the renter free to invest in other areas of profits. Meanwhile, the home owner is left to reconcile the differences between the profit and loss of the operation, a critical accounting step few home owners consider after the sale of a home.
Q: I can understand how renting would be better than owning homes, but do you ever find that renters are more vulnerable to market manipulation than homeowners? Homeowners are at the mercy of interest rate manipulations, but renters (as we’ve experienced here in Victoria) are at the mercy of foreign ‘investors’ who buy and keep homes tenant-less to drive up rental demand and prices.
A: The rate of rent is usually controlled by the market itself. In other words, one landlord cannot arbitrarily demand excessive rent beyond what the market will tolerate. At the same time, rent will periodically rise, partly because of inflation, cost of amenities, demand for certain areas, etc.
However, when the cost of living is compared between the average renter and home owner over a period of time (seven years, for instance), the home owner will have spent more money on the home with no extra benefits. In some cases, he or she may walk a away with some cash after the sales of the property, but the profit and loss statement may tell a completely different story.
Q: Is there a way to dismantle the scam? What needs to be changed?
A: Yes. The purchasing of a home comes with a long, established network of beneficiaries including local, state, and federal governments. For this reason, it seems that everyone makes money on the property, except the home owner. Undoing the network is virtually impossible.
On the other hand, when people are educated about the truth and decide to change the statusquo, positive things happen. For example, if people choose to rent and invest the extra money that would otherwise be wasted on a home, they would become wealthier as a result.
If this idea (renting by choice to become wealthy) begins to take root, the demand for homes would drop, which would ultimately initiate additional positive changes. Think of it, people would actually have money in the bank, and personal assets (not debt) would rise, which would be better for self, family, and the economy.
Q: Do you think there will be any change to the system any time soon?
A: No. changing the status quo will take time. However, instead of thinking about changing such a large influential network, people who are exposed to this idea need to avoid the scam altogether. They need to focus on improving their own individual and family circumstances. For instance, after purchasing three homes in a 30-year period, I am now a proud renter and plan to keep it this way indefinitely.
Q: Is there any point currently at which owning your home is better than renting?
A: The ideal situation would be to purchase a home without a mortgage. One can potentially make a profit when the property is sold, assuming that the market value does not drop below the purchase price. Keep in mind, however, that the government still retains eminent control over the property. In which case, a lien can be placed on it with the intent to sell and collect any unpaid taxes, leaving the owner in a vulnerable position.
The other wining option is to purchase a home with the intent to sell it immediately (days or months) later to another buyer for a profit—a lucrative real estate idea that many investors have put to use over the years. But then, that would negate the whole concept of “home ownership,” which is the point of discussion, and the envious goal for many.
Q: Is there anything else you would like to add?
A: Yes: It is generally recommended that people should take money from savings, 401(k) plan, IRA account, etc., for a down payment on a home. I wouldn’t recommend it. Here is why: The money in a 401(k) plan, IRA account, or any other savings program belongs to the person who “owns” it.
When the cash is withdrawn and placed on the home, the individual loses control and ownership of the funds. It gets locked in a property that belongs to someone else—the lien holder. At best, the money is unusable. The only way to retrieve it is through a reverse mortgage or home equity loan, both of which are debt instruments that add more financial burden on the home owner. Cash on-hand should be kept separately from the house. Better yet, it should be placed in a safe investment as liquid assets to counter some of the losses experienced in the home.
Thank you so much for your time.
My pleasure. Thanks for the opportunity to speak with you. Here is one of my websites: http://www.renters-win.com/