Why is renting better than buying property?

entrepreneur-question

(Question submitted by Lunga Tshikila and Kgomotso Mamunyani)

 

In South Africa, generally speaking, it doesn’t make sense to own the house you live in. Rather rent.

Here’s the math:

Average mortgage interest rates are 10%, ie: a property worth R1,2mil will have an annual interest repayment of R120,000.

Owning property entails both bond repayments, property taxes, and maintenance costs (none of which are for your account if you rent).

Therefore the effective annual cost of owning a house is 13%. (If you pay cash for a house, you don’t have an interest cost, but you do have an opportunity cost. That money could be earning interest in a cash management account, or be invested in the JSE.)

Compare this to the cost of renting. Average rental yields are 3%, ie: a property that is worth R1,2mil can earn R36,000 in annual rental income.

So the difference between renting and owning is 10% per annum

The only way you can compensate for that difference is to own a property that appreciates by at least 10% per annum. In other words, you have to gamble on property inflation.

South Africa has only experienced average property price inflation of greater than 10% once in its recent history: 2004-2008.

Most years you can expect no more than 5% in appreciation. The cost of owning your house is 8% (13% – 5%).

This is 5% more than the cost of renting (8% – 3%).

That means you lose 5% of your money every year if you own rather than rent the house you live in.

Unless your business is property trading, don’t be a property trader.

Rent.


Also published on Medium.