Should You Rent or Buy a House?
The financial debate about renting and buying a house is an ongoing one which which still leaves many questions unanswered.
The point is this: Whether you are renting or buying you need to understand your motivations for doing either and then what the financial implications for either decision could be!
Last update: 16 March 2009
This article briefly touches on the financial implications of renting and buying a property.
Below i will outline both the advantages and disadvantages of both renting and buying a house.
Advantages if you Rent a house
> Compared to market at time of purchasing your rental is relatively low.
> You have more fixed costs for the term of your rental lease.
> You won't gain equity capital in the house but neither will you loose any equity capital either while you rent.
> When the rental lease is over you can choose to stay or just move!
> Far less work in maintaining the property as your landlord/owner has to cater for this usually.
> No large deposits (like when you buy) involved in a rental. A small deposit only required.
> You can rent in a better area that you usually would not afford to buy in.
Advantage if you Buy a house
> Over time your bond balance decreases which in turn means your payments also go down.
> Generally you can modify and build on your house as you wish.
> If you stay in the house for many years your house is likely to have appreciated a fair amount which means that you are "indirectly" saving through your home.
>The proprotion of your repayments opposed to rental payment inflation means you land up paying less monthly over time.
Disadvantages if you Rent your house
> You never make any capital gains on the house no matter how much it appreciates over time.
> Limited options to personalize the house to your requirements.
> No major advantages.
Disadvantages if you Buy a house
> Variable maintenance costs and insurances
> House equity may go up or down or stagnate.
> Moving means you must first sell the house.
> Far larger capital outlay to buy a house.
> Comparitive to renting at time of purchase your monthly bond repayments are higher than rental prices.
Financial Implications If You Rent or Buy a House
With the current economic changes and property downturn it is hard to accurately determine house price projected growth due to the uncertainty so what i have done is to utilise historical evidence in order to provide a case to measure this example.
For purposes of demonstration I am perfomring this caluclation over a 10 year period only and assuming that you would sell your house that you did buy or decide to move if you are renting.
We are also assuming that you rent the same 'value' of place that you would have bought for this calculation.
The investment capital listed in the left rent column is equivalent to the deposit and purchase costs in the right column. This is assumed to make the calculation 'fair'. In this event the person who opts to rent will invest his R95 000 into a fixed long term saving or similar.
The idea here is to get the best interest rate from the saving and also compare this against the buy option.
'Property Inflation/Growth Rate: We have allowed for 6% growth. On average 8% can be asumed but recent changes in the economic cycle will have definately affected this calculation. For the sake of this depiction let's use 6%.
Costs if you Rent a house
Monthly Rental: R4 000
Invested Capital: R95 000 @ 6.5% pa
Costs if you Buy a house
Purchase at R600 000
Deposit Required: R60 000
Other Purchase Costs: R35 000
Bond Interest Rate: 13% pa
Maintenance Costs: R2 400 pa
Property Inflation/Growth Rate: 6%
House Rent or Buy Calculation Results
If you consider to buy a house for R600,000 with a deposit of R60,000 at a bond interest rate of 13.00% or as an alternative to this you may wish to to rent a house for R4,000 per month what can be concluded is:
After the 10 year period you will be R120,109 better off if you buy the house.
The calculation also shows that you would be better off buying from the end of year 8 as before this the rental is ahead financially.
In this calculation the first 7 years the rental is ahead in terms of cash.
The deciding factors in the outcome of such a calculation is the price of rent you are paying versus the property inflation rate.
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