The Rent or Buy Calculator has been live for almost two weeks now (barring some interruptions in hosting service), and we’ve had to tweak a few things. But it seems that the mathematical criticism has been mostly addressed, so I can now tell you how the calculator has ‘changed my mind’ on the Rent or Buy debate.
Traditionally, I’m a renter – and I’m not about to change that any time soon.
But over time, and especially recently, my reasoning for that decision has become more…nuanced. I’m no longer so committed to the idea that renting is, in general, the better financial decision. And perhaps more importantly, I’m realising that the financial justification for ‘home-ownership’ is an ongoing process rather than a once-off decision made when you place the offer on your soon-to-be new home.
So here are a list of rules/guidelines for you:
Axiom 1: rent for the short term
The biggest problem with home ownership is transaction costs – in South Africa, they’re high, especially once you move past the transfer duty threshold.
So if you’re only planning on staying for a couple of years, or you’re expecting some lifestyle changes (kids, marriage, a new job) that might require a relocation to a bigger/smaller/more convenient place, then avoid buying.
The exception: if you’re wanting to rent in an area that’s going through a massive housing price bubble, and the rents are through the ceiling.
How to make it work if you want to buy: don’t sell the place when you move (ie. keep the original property, rent it out, and rather rent your new home).
Axiom 2: if you can’t save the savings, then buy the house
There’s no doubt that homeownership comes with higher annual costs. You’ve got the higher maintenance and insurance costs – and then there’s the interest on the mortgage repayments. But if, by renting, you can’t actually invest all those costs that you’re not incurring, then just buy the house.
If you want to check that, just go and slide that ‘investment return’ arrow to the 0% return. You might notice that it will often drive the ‘effective rental’ negative? That negative effective rental means that someone would have to pay you to rent the house in order for it to be more worthwhile than buying.
The exception: unless you’re not staying in the house for very long – because in that case, the extra transaction costs can make homeownership so costly that even spending the monthly savings makes for a better use of your money. Also, where your home loan interest rates is much higher than the actual property return, and you’re having to take out a large home loan – then that’s a costly exercise.
How to make it work if you want to rent: just save the extra money.
Axiom 3: the quicker you can settle the mortgage, the better
And if you can buy the house upfront for cash, even more better.
The thing is, if you’re not having to ‘pay rent’ to anyone (either the landlord or the bank), then that is a guaranteed return. The sooner you can reach that point, the quicker you can start earning it.
The exception: again with the “not staying long enough to cover your transaction costs” part.
Axiom 4: avoid areas with low property returns relative to the rest of your investing options
If you have investing options that offer good returns, it’s quite hard for the property market to compete with that. Especially as low property capital returns tend to be linked with lower rental yields (because an overpriced market generally means lower rental yields).
But again, that’s assuming that, as a renter, you’ll save the savings.
How to make it work if you want to buy: pay the home loan off quickly, and then stay in the house for a really long time.
That’s what I’ve noticed from playing around with the variables.
Feel free to add any more in to the comments section. I’ll update the post with any new points that come up!
In case you’re wanting to see how some of the above points look in the numbers, here’s the link to the calculator again: The Rent or Buy Calculator