What is 'dead' money?

Jocksy

I've been advised by numerous people that I'm spending 'dead' money by renting? What does this mean? Is it a financial term? Is there any way to rent without spending dead money?

mathias

Very simply , in terms of a house or some kind of accommodation , dead money is money paid to a landlord instead of money paid off a mortgage , the idea being that money paid off a mortgage is another piece of the property that you own , in which case hopefully if and when you move , you have some cash back from the property , and not 0 , as in if it goes to a landlord.

Of course the Economists on here will tear that to shreds but its a simple view after all , its a fairly black and white outlook based purely on house prices continue to rise or remaining relatively static.

The_Conductor

Jocksy wrote:

I've been advised by numerous people that I'm spending 'dead' money by renting? What does this mean? Is it a financial term? Is there any way to rent without spending dead money?

There is no scientific basis whatsoever for the term "dead money".
As per mathias explanation- some people consider money paid in the rental of property as a waste of money, or dead money as they put it- their theory being that you should aspire to own your accomodation- irrespective of what this means to you in economic terms.

At present rental yields are lower than interest rates (a broad generalisation, but true for the most part)- so it is cheaper on a long term basis to rent a property than to buy one and pay back interest along with the capital borrowed to the mortgage providor. The "dead-money" crowd normally suffice this with saying that the capital appreciation will offset the increased repayments necessary to cover interest over and above what it would have cost you to rent the place in the first instance, rather than buying it. At the moment nominal mortgage interest rates are higher than inflation (4.5% versus roughly 4%) thus it could be argued that far from there being an appreciation in the asset to factor into the equation- there may be a depreciation when the money is discounted into today's terms......

In short- dead money is a term employed by people who I loathe to say, are akin to being brainwashed into the notion of owning their property at any cost whatsoever. The fact that you can rent accomodation of a far higher standard than you can ever aspire to buy for similar money, and thus enjoy a vastly higher standard of living, simply does not enter the equation.

At the end of the day- its a matter of choice. Are you willing to sacrifice a large chunk of your income towards a house/apartment that will eventually be yours in 30 years time- or would you rather live to a standard above that which you could afford to pay for, were you to try to purchase it..... On the continent most people prefer latter- in Ireland, the former. While there are historical reasons for despising landlords and all they signify, some people have elevated this to an entirely different level.....

Shane

iguana

smccarrick wrote:

The fact that you can rent accomodation of a far higher standard than you can ever aspire to buy for similar money, and thus enjoy a vastly higher standard of living, simply does not enter the equation.

This is not true in all parts of the country. Dublin does not equal world.

Pa ElGrande

The "Rent is dead money" line is normally followed up with "Property is always a good long term investment".

In a nutshell the calculation is fairly straight forward, if you can rent in your area cheaper than buying a similar property in what is now recognised as (at best) a static market, then why not save your cash and use it is a deposit for when you feel comfortable buying?

On the other hand, if you can obtain a substantial discount on your chosen property, organise a repayment mortgage cheaper than your current rental and you believe your employment outlook is stable, then why not buy?

The_Conductor

iguana wrote:

This is not true in all parts of the country. Dublin does not equal world.

I know Dublin prices are not mirrored elsewhere- but it is a good generality. Rental costs elsewhere lag Dublin rental costs- so its a case of swings and roundabouts. A 3 bed bungalow in North Wicklow costs twice as much as a similar property in Mounthrath- but the one is Mounthrath only costs about 60% as much to rent (again a generalisation- but it holds true roughly).

Rental yields in Dublin are on average slightly lower than outside the Pale (currently about 4.5% versus up to about 6%).

Sure property elsewhere is cheaper- its a measure of desireability- but this is also reflected in what people are prepared to pay for renting the self-same property. Swings and roundabouts.

soma

From the perspective of renting vs buying, an albeit simplistic way of looking at it in the Ireland of today is that you have two options.

You either:

a) rent the property from a landlord or
b) rent the money to purchase the property from the bank (i.e. the interest you pay)

Both of these expenses are a price that you are paying for a specified service (what the frankly financially illiterate refer to as 'dead money').

So do the maths ( http://www.jeacle.ie/mortgage ) and see which you feel is more beneficial to you.

Jocksy

Thats great. I had the feeling all these people were talking **** just to justify their own choices. I'm quite happy to rent for now, living in a much better place than any of these people and paying much less than they are for mortages so I think it is just jealousy.

tbh

smccarrick wrote:

There is no scientific basis whatsoever for the term "dead money".
As per mathias explanation- some people consider money paid in the rental of property as a waste of money, or dead money as they put it- their theory being that you should aspire to own your accomodation- irrespective of what this means to you in economic terms.

At present rental yields are lower than interest rates (a broad generalisation, but true for the most part)- so it is cheaper on a long term basis to rent a property than to buy one and pay back interest along with the capital borrowed to the mortgage providor. The "dead-money" crowd normally suffice this with saying that the capital appreciation will offset the increased repayments necessary to cover interest over and above what it would have cost you to rent the place in the first instance, rather than buying it. At the moment nominal mortgage interest rates are higher than inflation (4.5% versus roughly 4%) thus it could be argued that far from there being an appreciation in the asset to factor into the equation- there may be a depreciation when the money is discounted into today's terms......

In short- dead money is a term employed by people who I loathe to say, are akin to being brainwashed into the notion of owning their property at any cost whatsoever. The fact that you can rent accomodation of a far higher standard than you can ever aspire to buy for similar money, and thus enjoy a vastly higher standard of living, simply does not enter the equation.

At the end of the day- its a matter of choice. Are you willing to sacrifice a large chunk of your income towards a house/apartment that will eventually be yours in 30 years time- or would you rather live to a standard above that which you could afford to pay for, were you to try to purchase it..... On the continent most people prefer latter- in Ireland, the former. While there are historical reasons for despising landlords and all they signify, some people have elevated this to an entirely different level.....

Shane

very interesting post Shane, I never really thought about it that way.

hmmm

"Rent is dead money" is a term trotted out by lazy types who won't (or can't) do the maths of renting versus buying and would prefer to rely on simplistic soundbites. Fair enough, it's their money their losing. I could I suppose grow my own food, but I don't consider shopping for groceries to be "dead money" - not much difference.

mukki

hmmm wrote:

I could I suppose grow my own food, but I don't consider shopping for groceries to be "dead money" - not much difference.

everyone renting should that one that one liner,for the "dead money" auld ones

ronbyrne2005

Well as prices in many parts of Dublin are falling (a house in my estate sold for 735k last may and identical one sold for 700k in Jan07) buying a depreciating house is'nt a great idea. Remember when renting you don't have all the maintence insurance etc and when buying if your house is'nt rising by at least inflation(currently 5%) its depreciating in real terms.

rain on

mukki wrote:

everyone renting should that one that one liner,for the "dead money" auld ones

Along similar lines (I think), someone pointed out before (possibly on this board) that if you pay bus fare every day for thirty years and don't get a bus at the end of it, you don't call that 'dead money'..

Peter Collins

that phrase "dead money" is a load of sh1te, but there are limitations with renting such as not being able to decorate properly, dodgy temp. neighbours and landlord calling in..

I'm just about to know what it's like to "own" your own place, but it feels better already!

Victor

Of course, some of these people are property owners perpetuating the "must buy property" mantra, so you can justify their actions for them.

iguana

smccarrick wrote:

I know Dublin prices are not mirrored elsewhere- but it is a good generality. Rental costs elsewhere lag Dublin rental costs- so its a case of swings and roundabouts. A 3 bed bungalow in North Wicklow costs twice as much as a similar property in Mounthrath- but the one is Mounthrath only costs about 60% as much to rent (again a generalisation- but it holds true roughly).

Rental yields in Dublin are on average slightly lower than outside the Pale (currently about 4.5% versus up to about 6%).

Sure property elsewhere is cheaper- its a measure of desireability- but this is also reflected in what people are prepared to pay for renting the self-same property. Swings and roundabouts.

This house in Limerick rents for the same as the mortgage payments on a 90% mortgage on this house on the next street. (And that is without including the TRS, if that still exists then the mortgage payments are significantly lower than the rent for the first few years anyway.) They are virtually the same house, in the same estate, so are equally desirable. I don't know about the situation in other parts of the country as Limerick and Dublin are the only two areas where I can tell a desirable area from a kip or a suburban wasteland.

Before I bought my house I rented for 3 and a half years which cost me €35,000. If I'd bought sooner I'd not only have saved about €20k on rent but I would have been able to afford a 3/4 bed house fairly close to the centre of Dublin. Somewhere nice, like Harolds Cross or Kilmainham. And the rental value would have more than covered the mortgage when I moved to London. I don't know if I'll ever get that chance back and those places are high on my list of areas I'd like to live in when I decide to start a family.:(

That said I wouldn't like to be faced with the rent or buy dilema in Dublin right now. The market seems to be insane at the moment. House prices are quite a bit higher than those in London, but without the same issues of supply and demand. Without a decent 24 hour public transport system anywhere more than 3kms from the centre of the city becomes unreachable without a car at night.

Buying in Dublin a few years ago was a good idea, rents and mortgage repayments were similar. Buying in other parts of the country may be a good idea, depends on individual markets. Buying in the right part of London or the UK is a good idea, rents are higher here than at home, houses are still cheaper, though the market is rising fast in the cheaper areas. Buying in Dublin right now is a terrifying, possibly stupid path to take, but a couple spending €35,000 on rent in 3 and a half years isn't a smart option either.

ronbyrne2005

iguana wrote:

This house in Limerick rents for the same as the mortgage payments on a 90% mortgage on this house on the next street. (And that is without including the TRS, if that still exists then the mortgage payments are significantly lower than the rent for the first few years anyway.) They are virtually the same house, in the same estate, so are equally desirable. I don't know about the situation in other parts of the country as Limerick and Dublin are the only two areas where I can tell a desirable area from a kip or a suburban wasteland.

Before I bought my house I rented for 3 and a half years which cost me €35,000. If I'd bought sooner I'd not only have saved about €20k on rent but I would have been able to afford a 3/4 bed house fairly close to the centre of Dublin. Somewhere nice, like Harolds Cross or Kilmainham. And the rental value would have more than covered the mortgage when I moved to London. I don't know if I'll ever get that chance back and those places are high on my list of areas I'd like to live in when I decide to start a family.:(

That said I wouldn't like to be faced with the rent or buy dilema in Dublin right now. The market seems to be insane at the moment. House prices are quite a bit higher than those in London, but without the same issues of supply and demand. Without a decent 24 hour public transport system anywhere more than 3kms from the centre of the city becomes unreachable without a car at night.

Buying in Dublin a few years ago was a good idea, rents and mortgage repayments were similar. Buying in other parts of the country may be a good idea, depends on individual markets. Buying in the right part of London or the UK is a good idea, rents are higher here than at home, houses are still cheaper, though the market is rising fast in the cheaper areas. Buying in Dublin right now is a terrifying, possibly stupid path to take, but a couple spending €35,000 on rent in 3 and a half years isn't a smart option either.

I agree with much of your points but you overlook the costs of ownership such as maintenence, insurance, interest on mortgage,costs of furnishing etc. It was a good idea to buy in Dublin a few years ago but as you seem to agree its a very risky decision now. Rent is less than or circa half a 30 yr repayment mortgage in most parts of Dublin and the money you can save(cheaper monthly payment and no costs of ownership) by renting can be saved and invested in a tax efficient pension or a standard investment portfolio that can be easily liqudated if/when you decide to buy a house at a lower price in future.

antoinolachtnai

[Before you read this, I should put my cards on the table and warn you that I am basically a property optimist.]

I think it makes more sense to compare only the interest repayments + maintenance costs to the rental costs when doing the buy vs rent comparison.

The capital repayment is like money moving from one pocket to another; you still have the capital, just in a different form (property instead of cash). This means that the capital repayiment isn't an expense the way the interest is. So it isn't really relevant unless you are planning for a major property crash which would result in your capital's value being suddenly diminished. (If you believe that a major crash in property values will happen such that property will be worth less in 20 years than it is now, you definitely shouldn't buy).

You also have to bear in mind that rents may rise by a little every year over the course of the mortgage. If rents rise by 4 percent per year, then your rent will have doubled in 20 years, and your average rent over the period will be 50 percent higher than your current rent.

Interest rates could rise too of course, but the average interest rate over the next twenty years is unlikely to rise by more than 20 percent above current rates (and if you are making capital repayments, the amount of interest you pay will still decline over time). Also, interest rate hikes may drive rents up.

If the property is in an area that appreciates there is the prospect of at least some capital appreciation. You could put the difference between the interest and the rent into a pension of course, but over 20 years that is unlikely to amount to very much or give more than a few hundred euros return.

To follow through the 'dead money' thing, I suppose I could say that the difference between the rent and the interest over the next twenty years is 'dead' money, because it could have been working for you to build up some equity, but instead, it's working for the landlord. I wouldn't press this point too hard though. There may be good reasons why renting is right for you.

On the other hand, if the economy or the property market goes into freefall, it would definitely be better to have been renting. If this happens, however, you will probably not be in a position to do anything about it by buying a property. The economy may be weak, your job may be in danger, and the banks will be cagey about lending to people, especially people they haven't lent to before.

is_that_so

hmmm wrote:

"Rent is dead money" is a term trotted out by lazy types who won't (or can't) do the maths of renting versus buying and would prefer to rely on simplistic soundbites. Fair enough, it's their money their losing. I could I suppose grow my own food, but I don't consider shopping for groceries to be "dead money" - not much difference.

Agreed.
There is also something in our psyche about the idea of landlords. I thought we had grown beyond it but obviously not. In terms of property there is no such thing as "dead money" if you are looking for a roof over your head. It is generally easier to get 3 month's rent together than a whopping mortgage.