The Biggest Financial Decision of Your Life

Whether to buy a home or to rent one would probably be the biggest financial decision of most people’s lives.

Many Singaporeans used to think that buying was a clear-cut decision. In reality, there are many different factors to consider before making a decision.

For some, buying a home will be the more financially beneficial. However, there will be others who will benefit more from renting in a money sense.

This is the third part of my “Rent or Buy” series.

The first two parts looked at the pros and cons of buying and renting. The first part can be found here and the second part here.

In this final article, I will dive into the numbers behind making a financial decision.

The numbers to look at

There have been numerous articles written about the debate between buying and renting. In reality, there is no one-size-fits-all answer. Thankfully, the New York Times has come up with one of the best calculators around that can help one make a better financial decision. It can be found here.

Before we begin, it is important to note that this calculator accounts only for the financial aspect of the decision. There are lifestyle factors, which each individual should consider as well. These were highlighted in my previous articles and include factors such as the flexibility to relocate, status, comfort and privacy.

Now let’s dive in and take a look at the financial aspects of this decision.

The most important numbers to consider are:

  1. Cost of the home
  2. Length of stay
  3. Mortgage rate
  4. Down payment
  5. Length of mortgage
  6. Home price appreciation
  7. Rent price appreciation
  8. Investment rate of return (rate of return on money saved from buying a home)
  9. Buyer stamp duty
  10. Yearly property tax rate

To make our calculation simpler, I have removed variables such as ongoing maintenance cost, management fees, homeowner’s insurance, etc.

An example to consider

To come up with a good example, I have used a million dollar condominium as the property in question. I have also taken the rate of return, comparable to that of the S&P 500, a benchmark stock index in America.

  1. Cost of the home: A reasonable price of a home in Singapore for a three-bedroom condominium is around $1 million. Take note, that if you are considering an HDB or Built-To-Order, you may wish to add in the additional government benefits that are available to you.
  2. Length of stay: I have input the longest length of stay of 40 years into the calculator. This is reasonable for people who do not wish to move after their first purchase.
  3. Mortgage rate: Singapore has a low mortgage rate of around 1.5%
  4. Down payment: 20%
  5. Length of mortgage 30 years
  6. Home price appreciation: It is difficult to estimate the exact home price appreciation. In the last decade, property prices have risen around 40%. Using this historical data, and suggestions by CNBC report that home prices will appreciate by 5-6%, I will use an estimate of 5% in this calculation.
  7. Rent price appreciation: Again, this has to be a rough estimate based on historical figures. In this example, I have decided to use 4%.
  8. Investment rate of return: For this example, I will use the historical rate of 9.8% of the S&P 500 index.
  9. Buyer stamp duty: 4.6% based on a million dollar property applicable to everyone in Singapore. A foreigner will, unfortunately, need to account for an additional charge on top of this.
  10. Yearly property tax payable: In Singapore, this is calculated by using annual value. This is the annual revenue generated by the property if it is rented out. Owner-occupied properties have different rates than rented properties. For a million dollar apartment, the average property tax payable is $680.

After taking these considerations into account, the New York Times calculator shows that it would make more financial sense to buy a property only if you could not rent the same property for $2,892 per month or less.

In Singapore, renting a property that cost $1 million dollars would cost around $2,200. Hence, in this example, it is a better financial decision to rent the property instead.

Having said that, a slight tweak in this calculation can lead to very different results.

For instance, by changing the investment rate of return to 7.8% (the historical return for the Straits Times Index (SGX: ^STI)), it would be better to rent if the rent was below $1,740 per month. In this scenario, buying would hence turn out to be the better option.

Other factors like a lower home-value appreciation rate, or changing mortgage rate can also affect your decision.

The Foolish bottom line

It is important that people should consider all the factors before making any decision, let alone one of the biggest financial decisions in your life. Most people would assume buying a property is the best financial decision, but in reality, that may sometimes not be true. If we are to ensure that we make the best use of our money, we should instead make sure we factor in all considerations.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.