Have a read of this article that appeared this week on Moneyweb: “Buying or renting a property?”
The basic background:
- A reader has written in. He’s 33 years old, married with a wife and two children, works onshore, but gets paid offshore (presumably in forex), so the banks will only consider him for a 50% bond because he “works abroad”.
- He has R1.25 million invested in an equity unit trust, which he can use for a downpayment.
- Currently, he pays rent of R10,000 per month – which is basically paid for by the 12% return on his unit trust, with any residual getting re-invested.
- The question: does buying still make sense for him?
The answer from the author is “no”. Mostly based on the higher cost of buying versus renting*.
*On that note, I found this article link in the comments section: “The last house I’ll ever own” – check it out, it’s fun.
But that’s not the important point, because I’ve covered that side of things many times before. The part of the author’s answer that ties into what I’ve been thinking about for the last few weeks is this:
We place a high premium on liquidity; by buying your own home the biggest exposure on your balance sheet would be a fixed property, which is relatively illiquid. When one considers the electricity crisis, general deterioration of our infrastructure and sub-par economic growth, we don’t find South African residential properties an attractive investment. We much prefer exposure to good-quality listed companies and believe that such assets will give you a much better return over time.
I feel like this is something that often gets left out of the decision-making: you’re taking a hell-awful risk when you buy that place that you’re going to call home.
You’re taking bets on:
- This country continuing to be a good place to live;
- This city continuing to be a good place for well-maintained infrastructure;
- This suburb continuing to be up and coming;
- This street continuing to have good security;
- This part of the street continuing to be quiet, with good neighbours; and
- This particular structure not having too many absurdly expensive flaws.
I say this because, as I’ve mentioned before, I was in the market for a new rental recently. And for some reason, whenever I do this, I’m always surprised by the sheer number of places that I don’t want to live in. Or visit again.
And before anyone starts saying “well, people are more likely to take better care of their own homes than their rental places”, let me leap in here and say that’s not really true. I’d guess that people are more likely to renovate a rental home, because that’s going to generate them a return.
Here’s a list of reasons why I’ve passed on places:
- “Too small.”
- “The electricity board is in the wrong place – nowhere to put an inverter.”
- “The complex will only allow pre-approved repairmen.”
- “Geezlike – that’s not a real bathroom.”
- “Low water pressure.”
- “The caretaker suggested that I walk around without my shoes in order to keep the noise down.”
- “Could hear noise coming through the ceiling.”
- “Not enough off-street parking.”
- “Not enough off-street parking, and a history of car thefts.”
- “Too close to a highway.”
- “Too far from a highway.”
- “Too far from a Woolworths.”
- “Poor security.”
- “Weird neighbours.”
- “Bad vibes.”
I mean – I know I sound fussy. Which I am – because all that was after the initial screening of suburbs, number of bedrooms, etc that I did before even looking at what was available. And yes: I’ve a mental checklist of all the things that have made me go “Never. Again.”
But it also strikes me that I have it easy – because I just get up and move at the end of the lease period.
If I’d have bought any of the old homes, then all those things would be either:
- Things I’d be trying to hide from potential buyers; or
- Things I’d be trying to hide from potential renters.
The trouble is: these are all risks associated with home-ownership. And they’re not even the bigger risks: like damp, and bad service delivery in the area, and the propensity for flooding, and the smells that can be blown in your direction by the prevailing wind.
It’s just something to bear in mind when one is dashing about trying to buy a house. You’re taking a big risk – and not solely because there are things that you can’t see when you just drop in for that initial viewing, like the state of the walls underneath all the freshly painted plaster.
Which isn’t to say that you should never take that risk (see my feelings on risk-taking here): but make sure you’ve done some real research before you sign a mortgage bond. Because it’s just silly not to.