Buying vs. renting – it’s a question many tenants ponder. There are advantages and disadvantages to owning property that need to be considered. For most people, their property becomes their biggest financial asset – so it would be good to evaluate the benefits.
Let’s look at property rental first. In most cases renting a property will cost you less than owning that same property. If you take into consideration the bond repayment costs, rates and taxes, maintenance and insurance costs – these will almost always exceed the cost of renting the same property, initially. Remember that rentals increase and within a few years you may find your rent exceeds your bond installment.
Renting also gives you flexibility. At the termination of your lease you are able to move on without the concern of having to sell your property. And if the property needs maintenance then the landlord covers this cost.
It’s important though, to consider that when you are paying a rental, every payment you make is an expense. In other words, aside from the obvious benefit of the accommodation you enjoy, you have nothing left to show for your rental payments.
Now let’s consider property ownership. There are costs that are incurred when you purchase a property. These include transfer duty, bond registration costs, attorney fees, and the like. These are expenses which are unavoidable.
In many cases, when you purchase a property you will need to have sufficient funds for a deposit in addition to the costs already mentioned. Banks have little appetite for 100% finance – so your cash reserves will be required.
But are there any benefits to property ownership? Consider that, with every single bond installment you make, you are repaying your capital debt. Sure, a large part is initially interest – but your outstanding debt reduces every month.
At the same time, in every property market cycle, there will always be growth in your property value. Yes, markets do drop, as we experienced in 2008 – 2010. But they recover, as they always have done. So, when you take a medium to long-term view of property, your asset increases in value.
In simple terms, over 5 or 10 years your property will increase in value, whilst your debt reduces. The difference between the market value of your property and your outstanding bond represents your wealth. It’s a way of forced savings.
If you had been paying rent for the same time you’d have absolutely nothing to show for it. It could be argued that there are other investment vehicles that will give you a greater rate of return in the short term. But there are also many other investments that have shown a much lower return – think of the stock market crashes not so long ago.
The difference with property ownership is that you can finance it. Use the banks’ money. Banks have an improved appetite for lending against property – something they will never do for stocks and shares.
Additionally, one of the most significant benefits to purchasing is that you own your home. It’s yours. And that is a tangible and significant benefit not to be ignored. If your circumstances allow invest in property to benefit you both now and in the years to come.
Principal of Harcourts Platinum, and Director of Harcourts South Africa
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