To Buy or to Rent: Beyond Down Payments

It used to be considered a bit of a no-brainer to purchase property if you could afford it. This is because, historically, property proved to be a good investment, and made profits over a short-to-medium period (hence, the trend of ‘flipping houses’). However, when we consider increasing inflation and hiking interest rates, as well as the affordability factor – making home-owning even less accessible for many – the conundrum of ‘buy versus rent’ is no longer as simple a decision.

In this blog article, we unpack this topic. Read on to learn more.

Owning property has long been seen as the golden egg of milestone-purchases. For those seeking stability and wealth building, property has always been seen as a good way to achieve this (some of us have even learned that it’s a safer way to invest your money compared to other risky options). And yes, it can be these things, but we cannot bank on it being the case as it relies on a number of things such as the state of the property market. Additionally, there are many different methods of growing wealth, and not all may be a good fit for the kind of life you want to lead. Easy-to-follow guidelines are becoming scarcer in The Great Debate comparing renting and owning a home. 

“Renting is a waste of money” doesn’t offer a complete picture. When trying to make this decision,  lifestyle values or macro economic factors are often not seriously taken into account; and they should be. When it comes to crunching the numbers, there are a number of different online real estate calculators to start teasing out more of a picture of what your home owning journey may entail.

There is also the simple fact that property ownership is just not affordable for most millennials. In the ‘80s, a home in the United States might have sold for $67 000 (equivalent to R1 233 285) – adjusted for inflation, that’s about $215 000 (equivalent to R3 953 250) in 2023 dollars. But for 20-somethings looking to start a family and buy a house today, the median home sells for around $470,000 (equivalent to R8 599 698) – more than double! This is because, while real wages have flatlined, housing costs have more than doubled. 

Here are some of the pros and cons of renting versus home ownership, taking into consideration the property market in South Africa at the moment, and some tips when it comes to making this decision.

Comparing Apples with Pears

The renting versus owning debate usually comes down to three main factors – finances, the potential for stability, and long-term goals. Aspiring homeowners face the challenge of committing to higher financial responsibilities, the risk of debt, and unpredictable economic factors, rising mortgage rates and possible economic downturns. Owning a property might offer the psychological feeling of having “made it”, paired with the security of living on your own terms – less vulnerable to being kicked out at a moment’s notice and building home equity (which is the value of your home beyond what you owe, this can be used as collateral for loans or lines of credit). 

Real estate is a powerful wealth-building instrument, known for its substantial returns. Being able to make the financial move to buy can bring independence, as well as a sense of control and personal freedom. However, the barrier to entry is a significant upfront investment. 

On the flip side, renting offers financial flexibility and the freedom from some of the burdens of homeownership, such as the down payments, closing costs, property taxes, lawyer fees, loan interest, and ongoing repair and maintenance costs (for example, suddenly having to replace a roof or geyser). These freedoms should not be taken lightly. Making the choice between the two depends on your financial readiness, the local real estate market, and what suits your lifestyle best. It is a financial decision that has to be personalised and there is ‘no-one-size-fits-all’. Furthermore, if the pursuit of buying a house becomes disproportionate to your monthly income, you might start compromising on important areas of your standard of living.

The Renting Perspective

Renting, celebrated for its flexibility, gives individuals the chance to access spaces and amenities that may be financially beyond their reach were they to pursue owning property instead. This includes the possibility of residing in central locations, such as proximity to workplaces and vibrant areas like restaurant districts. This flexibility becomes increasingly important in the context of the changing global mobility of work, the growing influence of digitization, and the rising prevalence of remote work. On this spectrum you also have the “lifestyle renters”; a rising trend involving individuals (particularly millennials and those with higher incomes) choosing to rent luxury properties in smaller cities due to affordability and a preference for advanced amenities and smart technology, rather than pursuing homeownership.

Renting comes with its perks. You don’t need a massive upfront financial commitment, and you’re off the hook when it comes to major maintenance tasks – which gives a measure of predictability to monthly expenses (barring landlords raising rent). Added to this, jumping into homeownership without proper financial readiness risks becoming a rollercoaster of financial risks: if you struggle to pay the loan repayments, there is the risk of sinking into debt. If you don’t have a substantial down payment, your monthly bills and interest rates could go through the roof. What’s more, your credit score might take a hit if you’re not financially stable, limiting your future borrowing options. And if you don’t do your homework on property values and the ever-changing real estate scene, you could make some costly investment blunders. So, before taking the homeownership plunge, make sure you’re financially prepared to steer clear of these potential pitfalls.

On the downside of renting, it’s crucial to note that renters don’t build home equity over time, and the potential for rent increases can affect affordability. Rent in South Africa has risen significantly, with an average national increase of 4.2% from Q1 2022 to Q1 2023, marking the strongest year-on-year growth since Q4 2017. Tenant affordability is under strain due to high inflation and rising rental prices, with tenants now allocating 28.8% of their income to rent, up from 28.3%.

Purchasing a home can still provide seemingly elusive long-term security and the opportunity to accumulate home equity, but it comes with higher upfront costs, ongoing maintenance obligations, and limited flexibility, especially for individuals who may anticipate frequent relocations.

Let’s take a look at the option of buying property…

The Property Ownership Perspective

There are a few more factors to consider when it comes to owning property, which includes the break-even point, hidden costs, how it compares to investing in stocks, and the specific market in SA right now. We explain all these points below:

Break-even point

The simple equation of trading out your rent for your mortgage, and then renting it out to get your mortgage paid, is not quite so simple as it sounds. To make it work, you need to get to a point where your property’s profit equals the money you spend and the rental income you earn each year. That’s the “break-even point.” This break-even point is subject to change if rental rates rise or if the property is acquired at a price below its market value. In the latter scenario, the break-even point could even be negative, implying that the property’s value could decrease by a certain percentage, and you would still break even. To be financially successful, you need to think about how much your property’s value should grow compared to your expenses. The break-even point helps buyers understand the required growth for their property investment to make money in the long-run.

Costs involved in owning property

Owning a home comes with numerous hidden costs that often catch new homeowners by surprise. Beyond the obvious expenses like mortgage payments, property taxes, and insurance, there’s a wide range of additional financial commitments to consider. These hidden costs include property maintenance, utility bills, homeowner’s association (HOA) fees, landscaping, and home improvements. You might also encounter unforeseen emergency repairs, special assessments from your HOA, or additional property insurance. If you move further from work, your daily commute costs can increase. In some regions, you might need things like flood insurance (think recent weather damage in the Western Cape). The list goes on, encompassing everything from energy-efficiency improvements to chimney maintenance and specialist services. Being aware of these often-overlooked expenses is vital to making informed financial decisions when buying a home and ensuring you’re actually financially prepared for the responsibilities of homeownership.

Real estate vs. stocks

When deciding between investing in real estate or the stock market, it all comes down to your financial situation, risk tolerance, and what you hope to achieve. Real estate can offer passive income, tax benefits, and the potential for property value to increase – but it also demands a larger initial investment, has higher associated costs, and lacks easy liquidity. On the other hand, stocks provide liquidity, potential for capital growth, and dividend income, but they can be influenced by market volatility and emotional decision-making.

Real estate investments on average yield lower returns, whereas the stock market has historically provided higher average annual returns, making it an attractive choice for long-term investors. Real estate investments also often require active management, such as managing rental tenants and property maintenance, whereas stocks (including index funds and ETFs) offer a more hands-off approach with lower upfront costs. Real estate investments can also be heavily dependent on location, while stock market investments allow for more extensive diversification, reducing overall risk.

The property market in South Africa at the moment

According to Business Tech (“Big win for South Africa’s property market”) The South African Reserve Bank’s Monetary Policy Committee decided to maintain the repo rate at 8.25%, providing relief to homeowners and property buyers (keeping interest rates on loans the same). While concerns about future rate hikes due to inflation and rising fuel prices persist, experts believe the interest rate cycle may have peaked. The property market may become more active during summer, favouring buyers, but sellers might face challenges as properties take longer to sell, with buyers having more options. Despite challenges, there are expectations of increased activity and first-time buyers returning to the market.

Some questions to ask yourself when considering buying versus renting

  • Are you looking to stay in the house yourself, or get rental tenants in?
  • Do you want to live in the area where you’re buying?
  • What will your work commute look like?
  • Are you considering starting a family in the coming years?
  • What is your projected earnings and how stable is your job?
  • What is your credit rating looking like and what kind of interest rate could you get?
  • What type of down payment can you afford and have you been saving for one?
  • What type of home do you want to live in?
  • Do you have emergency savings above and beyond the bond payment and downpayment? 
  • What are projections for the local real estate market?
  • What’s the running cost of the property?
  • What are inflation projections?

Contact TVC Wealth and Health Managers for advice today on whether you should consider buying property or stick with renting. We can advise you on how best to invest your money, run through the numbers with you, and match your financial goals with your lifestyle.

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