In a depressed market, such as the one we are currently in, many people ask them whether it is more financially prudent to buy their own home or to rent one instead.
Although the amount of South Africans who now own their property has drastically risen, with the increasing cost of living and high personal debt-to-income ratios, many South Africans are selling their homes in order to downgrade their lifestyle to more affordable levels. The result is the need for many people to rent instead of buy a home. Rentals are also being fuelled by the fact that house prices remain relatively high when compared to earnings, the banks’ lending criteria remain strict and deposits are still required. This has made the move towards renting, gain increasing momentum.
The great news for buy-to-let investors is that the ‘renting trend’ is one that is not only growing in South Africa, but also in other countries around the world. In fact, it is expected that in the UK, the percentage of people who will be renting instead of buying their homes will grow by as much as 20%, while in countries such as Germany for example, over two thirds of the population do not own their own home.
Although this rental trend may seem high, the reality is that in many cases, renting is much more affordable than buying.
However, the number one argument for renting lies in the fact that there are other kinds of investments that will offer a much higher return. Investing in property can be an expensive exercise when you take the costs involved in buying a property such as; the transfer duty, bond registration fees, other legal fees, connection fees and moving fees. You also pay interest on a bond, and don’t forget the rates and taxes, the maintenance and insurance costs and the costs for the general upkeep of the property.
When you add all these expenses together, as well as the difference between the rent you would pay versus what you would have to spend on your monthly home loan instalment, this would leave you with a sizeable amount of money.
If you are disciplined enough to save and invest this money, it is estimated that you should be able to save enough money to buy a home cash over a period of 10 or so years, use it to reinvest in other avenues, or keep it as a nest egg for retirement purposes.
So what’s the point…
However, therein lies the crux of the matter – this kind of financial thesis is exclusively for the disciplined investor. “Unfortunately, most people do not have the required restraint to do this – if they have extra money, most people just end up increasing their living standards by buying more expensive cars, going on better holidays, or buying luxury goods for themselves or their home.”
The big argument for buying a home instead of renting one is that owning your own home is a forced kind of saving. “The truth is most South Africans do not save enough money for when they are older. However, being able to sell your home that you paid off over 20 years, and downsizing to a smaller dwelling will no doubt offer welcome financial relief when it is needed most. What would these people do if they had decided to rent 20 years ago?”
In order to benefit from buying property, consumers should get into the property market as early as possible. The earlier you start, the better off you will be. Also, keep in mind that any 20-year bond repayment will come down dramatically in real terms as your salary increases with inflation (assuming there are no drastic changes in the interest rates). This means that even though you might have to tighten your belt to ensure you have enough money for the monthly payments when you initially start, they will become much more affordable as time goes on.
The key to successful property investment is, to pay off your bond as soon as you can, live in your home for a minimum of five years so that you can recoup some of the initial costs, and to buy only what you can afford.
But, there are both pros and cons to renting a property as well as for buying one. Everyone has different criteria and levels of affordability. Renting can allow you to suss out an area or complex to make sure you like it before you make a long term commitment, or to allow you time to save up for a deposit. On the other hand, the sooner you can start paying off your own bond; the better off you will be with an asset to your name that will certainly show good returns over the long term.