RENT MONEY - Is Rent Money, "Dead Money"?. The construction industry often promotes housing for young potential homebuyers to rent that money is "dead money" that is money down the drain. They are encouraged to stop paying rent and instead use the money to pay the mortgage on your own home.I again became very aware of the power of this message selfish when my daughter aged 24, claimed he wanted to buy his property as soon as possible, because the rent was "just dead money." Although impressed by their determination to assume this obligation, I could not resist the opportunity to give a lesson in basic economics.
The reality is that rent is dead money, but the cost of homeownership. It is essentially the same as paying for a hotel room for the night or for a holiday of two weeks in a luxury resort.
We all pay the cost of housing accommodations, if rented to a third party or we own our home. And this is the case regardless of whether or not we have a mortgage.
What is the real cost of homeownership?
For the homeowner with an obvious cost of living space is what you might earn by renting your property, meaning that it is the "imputed income". This loss of income is a real cost. When viewed from this perspective, many without knowing it "pay" a lot of houses.
For example, the family residence of $ 5 million, probably "payment" (ie, above) of $ 150,000 pa or about $ 3.000 a week on the "imputed income". Often, this imputed income is a very high percentage of total current expenditure. And much more than many homeowners would pay to rent a property of another, assuming they were going to sell your home.
However, nominal income is not the true cost of home ownership. The real cost is the best alternative to give to commit funds for the purchase of housing, ie the opportunity cost.
And this cost can be substantial. This explains why the major supermarket chains and department stores in general, rental / lease of properties and not have them. They believe they will get a higher return for committing financial resources to the business of retail property instead. And you do not hear investors Woolworths experience suggests that the rent or pay for Westfield David Jones and others is "dead money".
For many youth, home ownership can be an alternative for the poor of their meager financial resources. What could be better at this stage of their lives to commit funds for a business or maximize their career options, while maintaining complete flexibility as to where they live. Buying a home is an important commitment that can stifle the desire to explore the highest potential risk, but greater opportunities for change.
The purchase of housing as a forced savings
So the rent money is not "dead money". It's the price you pay for something that is living space, value. And homeownership may not be the best use of scarce financial resources of a young person.
However, many parents of baby boomers are encouraging their children and adults to enter the property market as soon as possible. They feel that worked well for them and proved a great "investment", the value of the property always seemingly on the rise.
In our opinion, this way of thinking leaves much to be desired. A successful outcome does not mean that the original decision was correct. The conclusions drawn by the baby boomers order some reservations:
* Buying a home is primarily a lifestyle. It does not exhibit the characteristics of what we believe is the practice of investing well;
* An important reason for buying house worked so well for baby boomers is that high inflation has helped to alleviate the pressure of the mortgage, and
* Loans to buy a home is a form of forced savings. Money that might otherwise have been fully allocated to consumption, with nothing to show, twenty years later, was used to pay the mortgage debt. As a result, baby boomers are now largely free housing debt to give them a sense of financial security that they would like their children to enjoy. But the savings, rather than shrewd investments, was primarily responsible for this desirable outcome.
Clichés valid and dubious logic does not have to make good decisions, especially when the decision regarding a debt obligation at home. Ideally, the option of buying a home has to be rigorous in comparison to alternative uses of limited financial resources.
Of course, for a young person who does not have much discipline and / or can not be better identify alternative uses for their funds, then the loans to buy a house, with its inherent forced savings, may be a good option . But the phrase "rent money is dead money" and that implies that it makes economic sense to rent are dangerously misleading.
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