A few years ago this was a very hot topic. Is it better to buy your own property or is it better to rent? Lots of arguments were offered for both cases, but none was very conclusive or thoroughly convincing.
Recently, I have read a couple or comments on the topic again. I want to offer a few ideas.
Firstly, who-ever decreed that we MUST live in our own house? Why can I not rent forever? It is a fact that I can afford a much better rental property than I can afford to buy.
Secondly, owning a property, as the clever people of the press and the banks and the investment world consistently remind us, is the most costly investment we will ever make. I differ. Does your house bring money in or does it take money out? Is it cashflow in or out? If it is not cashflow in, then it is not an investment. In fact, no matter where you live, it will always be an expense.
Do I hear somebody say: yes, but at least I am paying the rent to myself. That is fair. The question is, is it the best option?
So let’s consider.
Suppose the rent is R4 000 per month and to own the property you have to invest an extra R3 000. That means you are “investing” R3 000 per month into your own house that you could invest elsewhere. Now, the same clever people say that over time property never beats inflation. So, if you only have your home, the investment grows by inflation.
But there is an opportunity cost. Since you invest R3 000 per month in your own property growing at the inflation rate, you cannot invest elsewhere.
Let me explain. Let’s say I rent my house and buy a flat to rent to other people. And let’s say that I have to contribute R3 000 per month to this flat. Now an interesting thing happens. Within a few years the rent is more than the bond repayment. That is why I a can easily make 25% and more on a rental property.
It boils down to the following: over 20 years I can buy one property that I live in, or I can rent and invest in a couple of properties that pays me an inflation linked income for the rest of my life.
My daughter starts working as a medical doctor in January 2009 (yea, free medicals for the rest of my life J) and I told her to do the following. As soon as she has three salary slips (and can apply for a bond) she has to buy her first rental property. She should buy as many as affordable as quickly as possible. While doing this, she should stay as cheaply as possible. Soon she will have enough properties to be able to afford any house she wants.
So, should you buy or rent? As long as you invest in the property market and you are exposed to the property market, I think renting is a better option.
Tags: Financial Freedom, Property
[...] That means you are “ investing ” R3 000 per month into your own house that you could invest elsewhere. Now, the same clever people say that over time property never beats inflation Read more [...]
What about?
Buy a place with rental income onsite (granny flat, 2 is better). Now you use your R4000 that would have gone into renting and add the 2 granny flat incomes to get to the monthly payment.
Maybe a deposit or re-investment can also help.
Good idea,Gerhardt. I thought about it at my home, but it means I lose some of my privacy!
That’s the trade-off. You must do it in such a way that you still keep most of your privacy. But at least you get best of both worlds – paying a “renting monthly amount” but the property is still yours. So your small montly payment also goes into paying off another property. So nothing goes to waste (renting).
(Gerhardt, I like this – so much that I started a tips page! Thanks, Piet)
Makes sense, but Piet’s daughter may not earn enough to buy a property with granny flats. But all the same, something to consider.
I suppose Piet’s daughter could also buy a 3 bedroom house and rent out some of the rooms? It is an invasion of privacy, but if it can help? Is she married? Then she has somebody to help pay:)