The Wealth Room

Is it better to rent or buy a house?

Today we are going to touch on the subject of renting VS buying. This topic came about after I put together a piece on is buying property a good investment. If you haven’t read that article it might be worth your while to skim over it or just re read it to get a little more context for this post. However, if you do not have the time to, then I think the principles will be self-explanatory in the post below.

I must also add a disclaimer that you will have to look into each individual situation and do the maths to see how it turns out, as there are just too many variables for me to cover in a short post.

Let’s touch on buying property with a bond VS renting, which is your worst case scenario. Buying property for cash VS renting is a no brainer in my opinion as long as you make sure that you get the property for at least a 20% discount of Market value so that you will be making money from the word go.

Let’s say that you buy a 1 bedroom property for R1000 000 of about 71 sqm, in the center of a city (average cost of property in a city center can be anything from R14 000 – R22 000 per sqm and outside of a city R10 000 – R15 000 per sqm) and it is has a 90% bond (R900 000) over a period of 25 years with a 9% interest rate. Your monthly premium will be R7552pm and the total repayments after the 25 year period will be R2 265 830. If you add in Bond registration, Transfer cost and the R100 000 deposit that would have been an extra R153 000, so your total costs would come to R2 418 830 over the 25 year period excluding maintenance costs, possible rates and levies (that can add up very fast so factor this in on each individual case). You would then have a property that is worth R2 400 000 if the growth rate on the property is 5% (please keep in mind this is an average forecasted growth rate for property and some areas can achieve more and some areas can achieve less). However after this point, you will have no further monthly payments and the property will be yours.

If you had to go and rent the same property, you would have to pay anything between R5500 pm to R8000 pm (Apartment (1 bedroom) in City Centre  5,500 – 8,000.00 Average of R6500) . However let’s say for this example that you received a good deal and have to pay R6500 pm as it’s a large 1 bedroom apartment in the center of Cape Town. Let’s say you will have a rental increase of 7% every year. If you had to rent this property or similar properties for a period of 25 years, you would have paid R4 862 273 for the full period!

The one problem with the above assumption regarding renting, is that not many people are going to rent out one property for 25 years, and if the rent gets too expensive due to the increases becoming too much, they will also move to something that meets their budget.

So as you can see that renting property VS buying property in the long term can be double the cost  and you also do not own anything at the end of the day. However, please keep in mind to have a look at the post on buying property as an investment when you want to buy property, as it will help you to make buying property into a successful investment!

My conclusion is a follows

Renting property for the short term, is not too bad, however you want to start making arrangements for yourself being set up as soon as possible to be able to buy a property in your dream area. So during the time of renting a property try to get yourself into a position to start saving as much funds as you can. This will help you to at least cover a good deposit on a house and also cover the transfer and bond registration fees when you buy your dream home that you will be able to call your own!

On the other hand you will also get the other school of thought that will say that if you’re disciplined enough (very important in this option), then take the amount of money that you save every month from renting instead of buying (R1052pm in this case) and the deposit and transfer cost (R153 000) and invest these funds in an investment over 25 years. Then you could get a better return on your money. So if we start a Unit Trust investment of R1000pm with a R153000 lump sum for 300 months and get a return of 15% over that period (not to hard to achieve) you can get a capital return of R4 366 758 and if you reinvest the dividends it could go up to just over R9000 000. So then you’re better off than buying, but at the end of the 25 years, you also won’t have a property, and we have no idea what the property market will look like at that stage.

So as I mentioned from the beginning it’s not as easy as creating a blue print for one size fits all, you have to do the math’s on each case.

If you liked this post you will also enjoy the following posts:

Is buying property a good investment

The best unit trust for you

Making tax work for your retirement

All average prices have been gathered from Numbo.com

www.biznews.com/undictated/2013/03/why-buying-beats-renting-despite-what-the-fundis-say

www.moneyweb.co.za/moneyweb-investment-insights/buying-a-house-vs-renting-and-investing-in-shares