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
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
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
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.
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
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
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.
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
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.