To buy or not to buy - that is the question.

To buy or not to buy - that is the question.
A recent article in the paper caught my attention. It was a heartbreaking story about families being evicted from their apartments because a developer had purchased the property and sold units to prospective buyers. The families were now being evicted to make way for the renovators and new owners. Without getting into the legalities of the issue, and there are many, it is the lack of ownership that creates the final problem. Is it better to rent or buy in today's environment?

Rent vs Buy
In today's current environment many properties are being rented out at substantially less than what would be the bond repayment on the same property and this is given as a very good reason to rent rather than buy. Only last week I had a discussion with a friend where he boasted about the fact that he was renting his own property and how much he was saving in the current environment.

Simpler Better Cheaper
If we look at the figures he is absolutely correct. His rental property was worth R900 000 and was being rented by him for R4 500. Also on the property was a cottage that he was allowed to sublet and derived an amount of R1 300 per month from this. On the ownership side, if we included rates and taxes, levies and costs to transfer of the R900 000 property, the repayment for the new owner would have been in excess of R10 000 per month. The equation then is R10 000 or more to own the property or R3 200 to rent. The R6 800diffrence being a persuasive argument to rent.

Today Tomorrow Together
That is the snapshot of the cost of ownership of that property for an individual today. What it doesn't take into account is the cost of ownership or rental further down the line. Lets say that both the rent and the value of the property escalate at 10% per annum. (This hasn't been the case over the last few years where rentals have risen slower or fallen and escalating values have far exceeded the 10%, but we're looking at principles here.)

In just over 7 years both the rent and the value would both have doubled. A R9 000 rental would then be close to the value of today's bond repayment (given a consistent interest rate etc). The value of the property would have escalated to R1.8 million making the owner R120 000 per annum in capital growth.

How can we help you?
So the value of renting today and the R50 000 savings per year in cashflow is buying you the equivalent of a subsidized cost of living for the next 7.2 years.

For Renting
Renting can be beneficial and if the renter uses their rental status wisely it can pay off. The extra 200% of disposable income is substantial and the savings should go towards investment and not towards lifestyle purchases. Banks restrict customers to purchasing up to a level of 30% of their income so by renting an extra amount is freed up to fund property financing.

For Ownership
Within the 7.2 time-frame the owner would have substantially reduced his bond and also would have access to the increased value within the property as positive equity for other endeavours. There are other mechanisms of making the property ownership more affordable. Purchasing the property in a legal entity and installing yourself as a tenant can have you benefiting from both the owner and tenant perspectives. The cottage can also be rented out to subsidise the cost of ownership. The income and capital gains tax, however, become quite intricate and beyond the scope of this example.

Is there a right or a wrong?
Both sides of the argument have merit. It is prudent to take the view that you have to pay to stay somewhere and then the cost difference in ownership is the cost of future possible prosperity and security.

Conclusion
The caveat for renters is that the saving in renting is directed towards a savings or investment plan that will allow property ownership at some stage so as to avoid the situation of being evicted or vulnerable to escalating rentals.

The caveat for owners is to make sure they are aware of all the costs and risks of property ownership and to be in a position to take a medium to long-term view on property as an investment.

Note: Apologies to William Shakespeare and all banks for using and abusing their slogans except for one who believes as Reebok does that they don't need one.

Article by: Dave Welmans - (www.thepropertygame.co.za)