Residential Property – Rent or Buy?

Financial gurus will tell you how buying a house is such a great investment. Very often, you will also be told how to select the best location to secure the best returns, how the value of your house will increase over the years and how you may walk away with significant profits should you decide to sell the house after a few years.

Is there any truth to all of these?

The property market is filled with misconceptions and biased opinions that are meant to lure an average consumer into heaps of debt while the true money makers are the banks and real estate agents.

Why do people buy houses either way?

Simply put, the first reason people buy a house is that they perceive it as an investment. The second reason is simply that we need a place to sleep or to call home.

Is a house a real investment or is it a liability?

An investment or an asset is something that brings economic benefits to you. If you can’t buy a house cash, you will need to take out a bond with a bank. This bond has to be repaid with interest, often over a significant amount of time. This is the opposite of bringing economic benefit to you as servicing the bond is taking money from you.

There is also the “value appreciation” aspect that needs to be considered. Though it is true that the value of your home will increase over a period of time, will it suffice to beat inflation? Over periods of time, the value of money diminishes. A hundred rand note would have bought you more goods 10 years ago than today. This is called "inflation".

The residential property market in South Africa has over the last decade if not more, only managed to beat inflation by a small margin. With the cost of living in South Africa expected to keep increasing, thus increasing inflation, the small margin at which the residential property market used to beat inflation by might not be seen in the coming years.

In determining real investment profitability, one has to also consider the costs involved in securing and selling the investment. One has to factor house maintenance costs over the years, real estate agent costs, transfer duties, capital gains tax, etc. Coupled with inflation, one would be incredibly lucky to see any real return when selling a residential house that was used as primary residence.

Then there is the reason that we all need a place to sleep. Well, this is easy…you can rent. As an example, you can rent out a bachelor flat Cape Town CBD or surrounding areas valued at R1.4mil for about eight thousand rands a month. If you were paying off a bond on the same property, you would be looking at a monthly instalment of about ten or eleven thousand rands, depending on the duration of the bond and the interest rate that is applicable to you. This is just the nature of the property market in South Africa.

If you are buying a house for investment reasons, perhaps you should consider all investment options before delving into the residential property market. There are government-issued bonds, money market accounts, exchange-traded funds, listed stock, etc and many other investment options that would provide better returns than residential property.

If you are buying a house because you and your family need a place to sleep, consider renting out a place that is suitable for you. This is likely to save you money and the money saved might be used to buy profitable investments.

Do not simply be lured into buying a house and remain with debt for the next 30 years thinking that you have an investment or somehow convince yourself that your only option to find a place to sleep is through buying a house. There are always many options, some even better than what we might have initially thought.