I’m officially two weeks into new digs. There is a library, and that pretty much makes it the dream.
New digs come with visitors, and most of those conversations go a lot like this:
Me: I feel like I’m living in a country cottage. All I can see from the bedroom window is rolling green. At night, I can hear the river nearby. And the best part: I can’t smell it*.
*Almost a default script at this point.
*contented silence with birdsong and brook-babbling in the background*
Visitor: If you don’t mind me asking, what are you paying in rent?
Visitor: Do you know what kind of place you could buy in suburbia if you were paying off a mortgage bond at that price?!
Me: Yes. But then I’d live in suburbia. I want to say something like “I’d rather die” – but moving to suburbia would mean that I’d actually died, which makes it roughly the same thing.
Visitor: But then why don’t you try and buy this place?
Me: Because I have a spreadsheet. Would you like to see it?
Visitor: I’m okay, thanks…
*more awkward silence*
Me: …so, um, how are you enjoying your new place? Have your conveyancing people managed to finalise the transfer yet?
Visitor: They tell me end of April at the latest. Of course, they also told me “before Christmas”, so I’m not holding my breath… Oh my word, is this the library?!
*conversation moves on to better things*
House-buying can make a lot of sense if you’re willing to live anywhere (because then you can get a good deal even if the living is sub-optimal).
But if you want to live in an area that is quite popular because of its convenience, setting, and low traffic thanks to lower-density housing, the current situation sounds a lot like this:
- The landlord tells you “Houses in this area are very expensive now. I mean, you hear of places going for R3.5 million and upwards.”
- But when you look around at the rentals, rental yields (based on those numbers) are between 5% and 8%.
- Between 5% and 8% gross.
- I would guess that most home-owners are only making 3% on their investment after home maintenance, rates, etc.
- If I was to become the landlord by buying, I would save the 3% that I’m offering as a renter, and then pay 9%/10% each year in interest to the bank.
- Not including all the transaction costs.
- And that’s just in Johannesburg. If you head to London or Cape Town – those discrepancies are much bigger.
Each time I do these numbers, I ask myself this question: “Sentiment aside, if I owned this as investment property, would I sell it?”
The answer is almost always “Well, I hope I would”.
Because of course, sentiment can’t be held aside – we’re not talking about bricks and mortar; we’re talking about former-old-homes and life-time investments and hope. Which is a loss aversion bias that I’m attempting to avoid for as long as possible.
Although I know it’ll get me in the end.
Speaking of which, this post was inspired by the recent “My long road to freedom” piece by Magnus Heystek. I’m not always his biggest fan – but I liked this one.
Following another unreasonable demand from the tenants, this time wanting the pool remarble-lited, I decided to give notice and put the house on the market. This was over-and-above other ‘discussions’ we had about the sprinkler systems/imaginary rising damp/the fish pond/curtains … you can fill in the rest. In short, I was gatvol. I just wanted shot of the house.
The discussions I had with a number of estate agents in the Dainfern area went something like this:
Me: “How’s the market?”
Agents: “Great, couldn’t be better. Show days are busy and there is a shortage of stock. All the experts agree. We will move the house quickly”.
Three months later the discussion went something like this:
Me: “What’s happening? Any offers yet?”
Agents:” The market has gone very quiet. Maybe we should drop the selling price some more….”
And so on. We all know the story.
If you want to invest in bricks and mortar, do so via listed property counters on the JSE or a collective investment property fund. Far better still, invest into an offshore property fund. Last year the returns were in excess of 30% and no local rate and taxes that can be squandered.
Check it out. Also, his earlier article: “Sell Your Investment Properties now“.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
Leon Hendricks April 16, 2015 at 04:05
So we were having this very conversation – the old buy vs rent argument and we agree the spreadsheets say rent, rent, rent. But has someone in reality ever proven it to be so? Any real world examples out there of someone who has actually rented, invested the difference and went back and bought a house in cash from those savings?Reply
Jayson April 19, 2015 at 09:35
I hear what you’re saying – going against popular opinion is a tough one, especially when the popular opinion takes the “I won’t pay someone else’s mortgage!” line, and then ridicules those who do.
And that kind of pressure almost demands a “Look at this successful guy – d’you see what he did? Empirical evidence, bru.” response.
The trouble is: you’re fighting against a prejudice, not a real argument. Any “real-life” examples will be treated as once-offs and exceptional items. Probably because, for most people, there’s a deeply vested interest in asserting the fiscal soundness of a decision that they’ve already made.
As I see it: this argument doesn’t require empirical evidence. It’s a case of looking at the options (annual rent at a cost of 3% of asset value vs annual mortgage interest of 9% of asset value), and deciding which option is more expensive. If you choose to save the 6% and plan to buy later, or spend the 6% on holidays, or spend the 6% on paying off your own home today, then those are all legitimate ways of spending your money…
To address the prejudice, I would ask “And why shouldn’t I help pay someone else’s mortgage? Why this particular aversion to helping someone acquire more assets? After all, every single day at work, I allow someone to profit off my intellectual capital. I add more value than I cost in salary – which is the negative sum total of why I get hired, because if I added no value, then I would not be needed. In this particular situation – renting makes the landlord’s investment cheaper, and it allows me to live more cheaply and invest in other things. We both win – and that’s no less acceptable than deciding that I want to be both landlord and renter (because that IS the home ownership decision).”
And in my mind, that’s probably the biggest misconception. We are all renters – there is no such thing as costless living. Some of us also choose to be our own landlords. And the only question to ask is: “Do I want to be exposed to the risk of this particular house, with all the benefits it brings – or would I prefer to try my luck with other classes of asset?”
I’m not sure if that helps… But I’m going to turn this comment into a post 🙂Reply