Renting or Buying?

Buying your first property is one of the biggest financial decisions you will ever make. Instead of insisting on owning a property, you may want to consider renting for a while longer before making the commitment that goes with owning your own home. Many buyers make huge financial mistakes when they blindly believe that buying is always better than renting.

Owning your own place has some advantages over renting. You have a sense of ownership and can improve the property to add value to your own pocket. In a rent situation, you may be able to negotiate changes with the property owner, but will not see much benefit. This however, does not stop you from decorating the property and making it feel like home.

Simply put, the financial difference between the two is as follows: Buying a property is extremely expensive in the first couple of years. It is not only transfer duty and attorney's fees to worry about, but initially also a large repayment. This becomes cheaper as your home increases in value and your home loan balance reduces. On the other hand, rent starts much cheaper and escalates every year without the benefits of the increase in the property's value. This increase in rent will take some time, and eventually become more expensive than owning a property.

Combining the rent-versus-buy scenarios, buying is more expensive in the early years and becomes cheaper to a point where renting a property becomes more expensive. The "breakeven" point where it costs roughly the same to buy or rent, is estimated to be somewhere between six and eight years, depending on your financial situation and how the property market behaves itself. House prices have performed so poorly over the last three years on average, that this estimated timeframe may go up to 10 years or more.

A recent study in the US indicated that the average American's financial situation changes structurally every seven years. This happens naturally, as you leave school, start studying, moving out to your first flat, get married, have children, etc. In South Africa, we go through the same life stages, and change our accommodation needs as we move from the one stage to the next. More often than not, we have to move to a different place as our needs change.

Financial discipline is the key to the success of making the rental approach work for you. It is important to remember to save any additional cash that you free up when renting, otherwise you will just increase spending at the expense of not owning a property. Renting and spending the freed-up cash is much worse than owning a property and having to sell in a short time frame.

If you foresee a structural change in your financial situation, or plan to move in the next few years, renting will almost certainly put you in a better position in the long term. fnb.co.za