Rent or buy? Here’s how to settle the debate
First-time buyers ask the question of whether it’s better to rent or buy property more than just about any other question.
There are proponents for and against each scenario and will tell potential first-time buyers anything from, “It’s better to buy as you will then not be paying off someone else’s bond”, to “Renting gives you the freedom to move quickly should you need to.”
Those in the pro-buying camp usually make their case by spouting the economic benefits of owning: Having an asset that generally appreciates in value; a house can be used as collateral should you need a loan; and the fact that a rise in interest rates (and their effect on bond instalments) generally does not exceed average rental price inflation of 6.4% per year.
The pro-rental club promotes itself by saying in developed economies, young people don’t see buying property as the be all and end all South Africans generally do; when relocating to a different city, renting first gives you an idea and feel for the suburb and its surrounds; and that many of costs of owning a home are not your responsibility when you rent.
The fact is, rent is not a four-letter word just as much as buying is not the pinnacle of your success: There are pro’s and cons to each and it’s better to base a buying or renting decision on your current and future planned circumstances.
But the simple answer to buying versus renting a home really is quite simple. All things being equal – you have an impeccable credit record, you have access to savings and you manage your money like a chartered accountant – there is only one question you need to answer: How wide is the gap between sale and rental prices in your desired suburb?
For example, if a suburb’s average sale price is R1m, your bond will be R8,900 per month (assuming you paid a 10% deposit). If average rentals in the suburb exceed this by quite a margin, you are better off buying.
To illustrate, two-bedroom apartments in Sandhurst rent for between R15,000 and R20,000 per month; if you are looking to buy a two-bedroom apartment you will be expected to pay upwards of R2,5m.
If you have R250,000 for a 10% deposit, your monthly bond repayment would be around R22,500 per month. This means, without even considering property rates and utility charges and services, as well as transfer fees and bond registration costs, it may be better to rent than to buy here. Of course, this is the short answer and ignores any long-term investment goals you may have.
In suburbs where the rental and bond repayment costs are on par with each other, favour should be given to buying.
In Honeydew, for example, a two-bedroom townhouse can cost in the region of between R500,000 and R750,000; likewise, rentals in this property class are between R6,000 and R6,500 per month.
This means your bond repayments – with a 10% deposit thrown in – would be between R4,500 and R6,700 per month. Buying, therefore, is cheaper if you can get your hands on the R500,000 townhouse or make peace with paying R200 more per month in bond repayments in the immediate term. If you were to rent in Honeydew today, by next year your rental would have gone up by the national average of 6.4%, or, between R384 and R416 per month.
While this is the simple answer, based only on economic factors, it should be top of mind when faced with the buying or renting dilemma many potential first-time buyers experience.
Have your say: What do you believe is better? Buying or renting, and why?