Residential - Is it better to rent or buy?

Piet van der Walt, Managing director of Sanlam Home Solutions shares his views on buying versus renting property.

The recent turmoil in housing markets worldwide coupled with increasing mortgage stress locally has many potential home owners wondering whether to buy or rent?

This debate is not something new and while there are definite long-term advantages of owning your own home, not everything is a bed of roses.

A major determinant is affordability. For first time buyers, access to credit has become almost impossible without having saved up to 20% of the value of the home you want to buy.

Other factors that may to a large extent play a role in the decision to buy or rent would be the individual's credit profile and increasing uncertainty over employment.

Any potential home buyer needs access to a professional financial adviser or broker who can do comprehensive financial needs analyses in respect of their current and future financial needs.

What is crucial in rethinking the buy decision is that you cannot take a short-term view when investing in residential property. On the other hand you should not even consider the option of buying when your debt ratio is not within norms.

Buying a home

Pros

Cons

Building equity and personal wealth

Not very liquid asset - especially when economy is down and the owner wants to sell quickly

Good performing long-term asset type from investment perspective

Cost of ownership - rates and taxes, insurance, maintenance, improvements, security etc

Sense of belonging to community, stability and security

Responsible for maintenance and tenure

Credit profile - improve ability to access funding as track record of repayment of loan will benefit individual

Possibility of loss of equity and foreclosure - risk in economic recession etc

Free to within building regulations change décor and landscaping etc

Less mobility than renting - time to find buyer linked to state of industry/economy

Not dependent on landlord to maintain property - own responsibility

2nd or investment properties can become cost burden in economic downswings and can lead to financial ruin in extreme cases

Best tax-free saving if additional payments are made into loan account

Cost of life and disability cover required to pay  outstanding bond in case of death/disability

Respect and recognition from society - human needs hierarchy

Location most important factor when investing in residential property

Property can serve as security for other lending purposes e.g. starting own business

Thorough planning needed before investment decision taken - location, location, location.

Inheritance value to family members

Huge responsibility and possibly some sacrifice initially

Paid equity and appreciation in value

Liquidity and cash-flow considerations to be taken into account  


Renting a home

Pros

Cons

Flexibility to move in times of uncertainty - e.g. job instability or security or possible transfers/relocations due to nature of work/profession. Some rental contracts may however require a long notice period for cancellation.

Paying off landlord's debt on his behalf

Limited or no responsibility for maintenance of property

Landlord reluctant to maintain property

Insurance costs - only content - landlord responsible for home-owners' insurance cover.

No equity/wealth creation

Renting higher value property than what you will be able to afford when buying - market conditions determine

Little control over rental escalations

No property rates, taxes or levies payable - landlord responsible

No guarantee of tenure after contract expires.

No home-owner association costs

No return on investment

Other funds can be used for other investments - not tied up in equity in property and difficult to access

Cannot offer as security for other lending purposes

Potentially/initially cheaper to rent than to buy - installment vs. rent

Permission from landlord for any alterations/improvements etc

When relocating create opportunity to study market and not take hasty investment decision

Rental increases annually normally linked to inflation - at one point cost to rent may break even and can even exceed cost of owning

No interest-rate risk - market conditions/ increases

Deposits required by landlord,  local authority

Good option if you don't expect to be in one place too long.

Can get caught in so-called rental spiral - never become a home-owner

* Piet van der Walt, is the managing director of Sanlam Home Solutions.

Article by: www.realestateweb.co.za