This is the RollingAlpha.com Rent or Buy Calculator. I found an awesome developer who has helped me put it together – and basically, we’re trying to give you a South African version of the American Buy V Rent Calculator that you can find over at the New York Times.
[Disclaimer: I do try and keep the background calculations here as up to date as possible, for changes in tax code, etc. But do bear in mind that this is just a tool, not a rule. So please don’t send me emails to say that you bought a townhouse on the back of this calculator, and now you’re suing me because you think the calculations are wrong, or because the post didn’t mention the downside of noisy neighbours and interfering Body Corporates. At your own risk, folks – at your own risk!]
How it works
There are so many variables that affect your decision to buy a house. There’s the price of the house, the mortgage, interest rates, insurances, renovations, transfer fees, capital appreciation rates – the list goes on and on. And because there are so many unknowns, it’s almost impossible to try and work out whether or not you shouldn’t just rent instead.
And this problem gets worse when you try to think about more difficult questions like “How long am I going to stay in the house?” and “But what if I did something different with the money – what impact would that have?”
So we’re here to help.
What this calculator does: it takes you through a list of all the big questions of home ownership, and it calculates the monthly rental you’d have to be paying before it makes more sense to rather buy the place.
And what we like most: the monthly rental cost will shift as you change your answers. So if you wanted to see the impact of a change in the size of your downpayment, you can!
Here goes…
tags
Step 1: The price of the new place
Let's talk about the home that you're wanting to live in...
EQUIVALENT RENT
Understandably, the higher the price, the higher your home loan repayments. And also, the higher the rental you'd have to pay if you chose to rent instead.
Step 2: The period of occupation
This question is especially important here in South Africa. Unlike the US, the South African tax system has transfer duties attached to buying a new house - and because of that, it gets really expensive if you're planning to buy houses every few years.
Let's talk about your life plans...
EQUIV. RENT
Step 3: The home loan
If you're planning to get some help from the bank, we need to take that into account.
Let's talk about your home loan...
EQUIV. RENT
EQUIV. RENT
That is: you're going to put down a deposit of
EQUIV. RENT
You could also use this to get an idea of how much it can benefit you to pay off the home loan quickly. Just play around with the 'Length of mortgage' period.
Step 4: Return on investment
If you're a homeowner, then you're going to be interested in the capital return that your house will bring you. If you're renting, then you'd be interested in the annual escalation in your rentals - as well as what return you could get on any savings that you weren't putting into the house.
So because we're comparing buying and renting, we'll need some estimates for all of those.
And of course we'll need to take inflation into account - because inflation affects everyone.
Let's talk about the future here...
EQUIV. RENT
EQUIV. RENT
EQUIV. RENT
EQUIV. RENT
Step 5: The hidden costs of buying your home
As a South African homebuyer, you're going to be paying transfer duties, standard conveyancing fees and mortgage bond registration costs. Those are all determined directly by the cost of the house and the size of your home loan, so we're just going to show you what they are. Then there are other standard costs, which can vary slightly - but are almost always around the R2,000 mark. We've included that as the default - but you can change it as you wish.
In addition, you might need to do some renovations when you first move in. Perhaps the bathroom needs to be painted, or you need to redo the kitchen. We want to take that into account as well.
Let me tell you about the hidden costs of buying your home...
Transfer Duty
Standard Conveyancing Fee
Home Loan Registration Costs
EQUIV. RENT
EQUIV. RENT
Step 6: The hidden and not-so-hidden costs of selling your home
The first big cost that people think about is the capital gains tax on selling your house.
But when it comes to the place that you live in, there is a primary residence exclusion that works in your favour. What that means: you really need to make a lot of gains on your home before you start paying any tax (at least R2 million).
That said, there are other costs at the end:
• your estate agent commission, which is generally around 8% (but you might be able to negotiate it lower);
• compliance certificates, which cost around R500 a certificate, and you'll probably be asked for three or four of them;
• your bond cancellation fee (if your bond is still in place), which is usually around R1,500; and
• and any costs of repairs and renovations prior to sale.
Now let's talk about the costs of selling your home...
EQUIV. RENT
That results in a chargeable capital gain tax of
EQUIV. RENT
EQUIV. RENT
EQUIV. RENT
EQUIV. RENT
Step 7: Don't forget the costs of occupation
The costs of buying and selling are important - but there are also lots of costs for living in a house.
If you own the house, then the costs are all yours. But if you rent, then you'll be splitting some of them with your landlord.
So to start, let's talk about the costs of home ownership:
Then, you have your maintenance, rates, insurance, utilities and (sometimes) levies...
EQUIV. RENT
That is a monthly payment of
EQUIV. RENT
EQUIV. RENT
That is a monthly payment of
EQUIV. RENT
EQUIV. RENT
And now for what you'd pay as a renter:
But if you rented, you'd just need to pay for some utilities and some insurance
EQUIV. RENT
EQUIV. RENT
That is a monthly payment of
So having taken that all into account, if you're able to rent this place for less than per month, then you're probably better off just renting instead. Although that's assuming that you actually managed to save the savings!
Here's how we got to that answer
We're looking at how you could end up in the same financial position in years.
When you buy your property, you're going to face these initial costs:
The Deposit
Transfer Duty
Renovations
And those pesky 'hidden' costs:
So that's a start-up investment from you of:
Then there are the running costs of home ownership. The breakdown:
For starters, there are your monthly home loan payments of:
So over the time period that you'll live in the house, that's a total of:
Then there are those other home-ownership costs:
Maintenance
Homeowners' Insurance
Municipal Rates
Monthly Utilities
Levies
So during your stay, including homeloan repayments, you'll fork out:
If you rented though, you'd only spend the following (in addition to your rental):
Monthly Utilities for lessee's account
Renters' Insurance
Which is a total of:
And you could have invested the savings!
Income Forgone on Initial Costs if invested (assumed taxed at 13.3%):
Income Forgone on Extra Recurring Costs:
In total, that's potential lost investment income of about:
But then you get to sell your home:
Selling Price
Less Costs to Sell
Less CGT
Less Capital Outstanding on Bond
So your net proceeds at the end:
So when you put all that together, the total effective cost of owning this home for the years that you plan to live there is . And if we work that back to an effective monthly rental today, it means that if you're paying more than in rent, then you should seriously consider buying the place. And if you can rent for less, then perhaps renting is more cost effective option...
The basic idea is this: if you're going to buy the house, then you should end up better off than if you rented. Especially as there's so much more admin involved in home ownership.
So if we work out all the home loan repayments and extra living costs and the lost income that you could have earned on those costs (and the initial deposit), and then deduct the gain that you make on the property itself, then we can work out the maximum rent that you should be willing to pay before it would make more sense to just buy the house. If you can pay a lot less rent than that, then rent!
But there is a caveat here: we're assuming that if you did rent, then you'd actually go and save these extra costs, and invest the deposit. For many people, that's easier said than done. In fact, for most of us, it's a lot easier simply to invest in a house (probably because it feels like spending money). And if that's what works for you - then buy!
Either way, it's a big decision. And we hope this helps.
Looks like there is a problem with total Bond payments when you say you will live in the house 20 years. For example a R1mil house, 10% deposit, 10.5% interest over 20 year homeloan:
“Then there are the running costs of home ownership. The breakdown:
For starters, there are your monthly home loan payments of:
R8,985
So over the time period that you’ll live in the house, that’s a total of:
R3,234,751”
Total should be R8985 x 12 x 20 = R2 156 400 (not so?)
Hey there! I tried to replicate this (a R1 mil house with a 10% deposit, 10.5% interest and a 20 year homeloan), and I saw monthly home loan repayments of R9,021, and a total of R2,165,127? Perhaps I’m missing something?
But I did notice that there is a problem when you plan to stay in the house longer than the duration of your home loan. I am definitely going to look into that, and have it changed.
I’ll see what I can do. Basically, I think that the amount to invest would be the difference between the “effective monthly rental” of the calculator and what you actually pay in rent (including utilities).
That’s your relative saving – because the calculator is working back to what you’d effectively have to pay in rent in order to be neutral between renting and buying (or, rather, what your effective rental is when you ‘own the home’ you live in – because there’s no such thing as costless living)…
Be helpful to create a “Per Month” Summary at the end. In other words, the monthly total cost over the life of the occupation when buying (everything), vs the rent and therefore the difference between the two is what you need to save on a per month basis in order to capture the benefit of renting (if in the particular case there is a benefit).
Look – it’s technically quite possible to get that kind of an answer. It just means that there’s no rent you could pay that would end up being cheaper than owning the house – a kind of ‘dream’ scenario. Just think about owning property in a hot bubble market, where you can pay in cash. In that type of situation, why would you not buy the place? You’re getting a great return for your cash, you don’t have to pay any interest, and the relative saving on monthly utilities is far outstripped by the return that you earn on the house. In fact, the only way for it to be worthwhile not to buy the place would be for someone to pay you to stay there. Hence, the ‘negative’ rental.
That is: “You’d have to pay me to stay here, thanks…”
Of course, it could also be an issue with the current formula (we’re already aware of one issue with the mortgage period vs the period of occupation, which we’re correcting). But I would also say that if there were no negative answers, then our calculator would be wrong. There are definite real world examples where it pays you to buy the house you live in.
Hi, this is a great tool. Can it work for the inverse scenario as well? I am pessimistic about future capital growth of the property market (future political upheaval). What would the scenario be where you already own the house, but think of selling it, and then renting for x number of years. What should the rent be to break even?
Great tool. Quite interesting to note the collaborative ‘co-creation’ unfolding on this platform. Necessitating those tweaks.
Perhaps this tool should not be restricted to this medium. Some of our affiliates posses an appetite for Big Data & Roadshows.
Depending on your headspace, we could compare notes, weighing options across the property/finance sector, to engage the market pre-purchase phase. Assuming you don’t hold a similar contract at present.
Agreed. Although it’s tricky: because generally speaking, the rentals are set by the market, not by the landlord. If a landlord sits with a house to let that isn’t attracting much attention, then the rental has to be lowered, regardless of whether it’s ballpark figure or not.
But what it can do is indicate to the landlord whether he shouldn’t rather sell the place…
Hey Mark. By “renter’s insurance” I just mean the insurance that you pay for the normal household coverage (ie. it’s something that you’d do for both renting and buying – but it’s just trying to relate it back to what goes through your bank statement). I was also allowing for the fact that a lease agreement may require that the renter take out specific insurance (I know that mine does).
Thanks Mark. We looked at it, but it’s not really something that has a dramatic effect on the final outcome. As in: money that you get back at the end of the rental period, assuming that you make sure that your rental contract includes a reasonable rate of interest, has a really minimal impact on the final numbers. But I’ll speak to the developer and see what we can do 🙂
Thank you for your response.
Is the inflation number that must be entered factored into all the expenses: utilities, levies, maintenance, etc?
The conveyancing costs are revised from time to time – are the most recent numbers automatically fed into the calculator?
A problem with comparing the buy and rent calculations is that home loans decrease and then stop, while a life-time renter will keep paying. Thus Step 2 doesn’t only matter for buyers but for renters.
Hi Mark. Yes, the inflation is definitely factored in across all expenses. And the conveyancing numbers are the most recent statutory ones (at least, they are at the time of writing this).
And I agree – how long you plan to live in a place is very important for the buy v rent decision 🙂
Hey Quintin! It seems to be working on my side – what are you seeing that has you concerned?
In case you’re worried about the ‘R0’ (some people have pointed it out) – just remember that there’s quite a large CGT exclusion for a primary residence (which I’ve taken into account in the calculation). So if you’re seeing “R0” as the CGT payable, it’s because your projected capital gains on the property are below that exclusion.
Thank you for the tool. I used the NY times one a couple years ago.
An additional feature I would enjoy, is a rental income feature. The house has a cottage which is rented out and the monthly income is R3500 and will escalate with rental growth.
I have done my masters on this topic in SA and enjoyed the availability of your tool for inputs.
I have developed another model/tool. I am of the opinion that Homeownership will lead to the optimal tenure decision in vast majority of scenarios. I agree with several of your inputs.
Very important are the assumptions that a person does save if renting and that persons who do save are the exception in South Africa.
Keep up the good work of informing South African’s on this important decision
This is such a useful resource. It’s been a huge help in my decision-making process.
One thing that would improve this so much for the use of a first-time buyer like me is the ability to save the settings somehow to return to them later.
Good day, Please confirm if it is advisable to buy R600 000 house with R950 levy, R500 rates and taxis. I am currently renting a flat and I am paying R4000 per month rent and R200 payment for refuse. I want to compare this over 5 years period. Please help. Thank you
Great tool! One thing to consider adding is an income section where for example you can rent out a cottage or a room on the property (in the case where you own the property). Similar outcome can by achieved by changing the interest rate (essentially the income is offsetting the interest cost). But would be good for it to be more explicit.
This is one of the coolest calculators I’ve seen, thanks, and well done!
Love the “tipping point” idea.
As a property investor, when it comes to the extraction of cash from the investment, I would love a similar calculator comparing the extraction of funds from an access bond from a rental property vs paying it off and extracting the rental income.
Comments
Anonymous September 27, 2016 at 10:58
I have not checked the maths – but a great tool – thanks and well done!
ReplyAnonymous September 28, 2016 at 06:37
Looks like there is a problem with total Bond payments when you say you will live in the house 20 years. For example a R1mil house, 10% deposit, 10.5% interest over 20 year homeloan:
“Then there are the running costs of home ownership. The breakdown:
For starters, there are your monthly home loan payments of:
R8,985
So over the time period that you’ll live in the house, that’s a total of:
R3,234,751”
Total should be R8985 x 12 x 20 = R2 156 400 (not so?)
ReplyJayson September 28, 2016 at 06:50
Hey there! I tried to replicate this (a R1 mil house with a 10% deposit, 10.5% interest and a 20 year homeloan), and I saw monthly home loan repayments of R9,021, and a total of R2,165,127? Perhaps I’m missing something?
But I did notice that there is a problem when you plan to stay in the house longer than the duration of your home loan. I am definitely going to look into that, and have it changed.
ReplyAnonymous September 28, 2016 at 07:23
Apologies, meant to say stay in the house for longer than 20 years.
ReplyJayson September 28, 2016 at 07:28
Yes – we agree. Thanks – totally working on it!
ReplyJayson September 29, 2016 at 12:40
FIXED #pleased
Replywerner September 28, 2016 at 09:03
Can you not perhaps make it more clear what the monthly amount is I should invest to be better off if the math shows that rent is better?
ReplyJayson September 28, 2016 at 09:24
I’ll see what I can do. Basically, I think that the amount to invest would be the difference between the “effective monthly rental” of the calculator and what you actually pay in rent (including utilities).
That’s your relative saving – because the calculator is working back to what you’d effectively have to pay in rent in order to be neutral between renting and buying (or, rather, what your effective rental is when you ‘own the home’ you live in – because there’s no such thing as costless living)…
ReplyJR September 28, 2016 at 09:11
Be helpful to create a “Per Month” Summary at the end. In other words, the monthly total cost over the life of the occupation when buying (everything), vs the rent and therefore the difference between the two is what you need to save on a per month basis in order to capture the benefit of renting (if in the particular case there is a benefit).
ReplyAnonymous September 28, 2016 at 18:06
-R1,777… Not sure what I did wrong
ReplyJayson September 28, 2016 at 19:31
Look – it’s technically quite possible to get that kind of an answer. It just means that there’s no rent you could pay that would end up being cheaper than owning the house – a kind of ‘dream’ scenario. Just think about owning property in a hot bubble market, where you can pay in cash. In that type of situation, why would you not buy the place? You’re getting a great return for your cash, you don’t have to pay any interest, and the relative saving on monthly utilities is far outstripped by the return that you earn on the house. In fact, the only way for it to be worthwhile not to buy the place would be for someone to pay you to stay there. Hence, the ‘negative’ rental.
That is: “You’d have to pay me to stay here, thanks…”
Of course, it could also be an issue with the current formula (we’re already aware of one issue with the mortgage period vs the period of occupation, which we’re correcting). But I would also say that if there were no negative answers, then our calculator would be wrong. There are definite real world examples where it pays you to buy the house you live in.
ReplyJaen September 28, 2016 at 22:21
Hi, this is a great tool. Can it work for the inverse scenario as well? I am pessimistic about future capital growth of the property market (future political upheaval). What would the scenario be where you already own the house, but think of selling it, and then renting for x number of years. What should the rent be to break even?
ReplyMD September 29, 2016 at 00:20
Hi Jason,
Great tool. Quite interesting to note the collaborative ‘co-creation’ unfolding on this platform. Necessitating those tweaks.
Perhaps this tool should not be restricted to this medium. Some of our affiliates posses an appetite for Big Data & Roadshows.
Depending on your headspace, we could compare notes, weighing options across the property/finance sector, to engage the market pre-purchase phase. Assuming you don’t hold a similar contract at present.
Blessings & Regards,
ReplyMD (gershonsa.co.za)
MD September 29, 2016 at 00:24
Hi Jason,
Great tool. Quite interesting to note the collaborative ‘co-creation’ unfolding on this platform. Necessitating those tweaks.
Perhaps this tool should not be restricted to this medium. Some of our affiliates posses an appetite for Big Data & Roadshows.
Depending on your headspace, we could compare notes, weighing options across the property/finance sector, to engage the market pre-purchase phase.
Assuming you don’t hold a similar contract at present.
Blessings & Regards
Replygershonsa.co.za
Peter Hutchison October 1, 2016 at 10:02
Seems this could be useful for the Landlord to determine whether his rental is “in the ballpark” or not.
ReplyJayson October 1, 2016 at 16:28
Agreed. Although it’s tricky: because generally speaking, the rentals are set by the market, not by the landlord. If a landlord sits with a house to let that isn’t attracting much attention, then the rental has to be lowered, regardless of whether it’s ballpark figure or not.
But what it can do is indicate to the landlord whether he shouldn’t rather sell the place…
ReplyGeno October 24, 2016 at 21:03
I was wondering how the calculations would change if one were to consider buying-to-let property?
Awesome tool, thank you.
ReplyMark October 28, 2016 at 21:43
I don’t know what is meant by “Renters insurance”. I thought this was compulsory in the US, but not here.
ReplyJayson October 28, 2016 at 21:50
Hey Mark. By “renter’s insurance” I just mean the insurance that you pay for the normal household coverage (ie. it’s something that you’d do for both renting and buying – but it’s just trying to relate it back to what goes through your bank statement). I was also allowing for the fact that a lease agreement may require that the renter take out specific insurance (I know that mine does).
I hope that helps!
ReplyMark October 31, 2016 at 20:25
Thank you. I think the deposit is something that should be factored into the rental calculation.
ReplyJayson October 31, 2016 at 22:49
Thanks Mark. We looked at it, but it’s not really something that has a dramatic effect on the final outcome. As in: money that you get back at the end of the rental period, assuming that you make sure that your rental contract includes a reasonable rate of interest, has a really minimal impact on the final numbers. But I’ll speak to the developer and see what we can do 🙂
ReplyMark November 1, 2016 at 20:42
Thank you for your response.
Is the inflation number that must be entered factored into all the expenses: utilities, levies, maintenance, etc?
The conveyancing costs are revised from time to time – are the most recent numbers automatically fed into the calculator?
A problem with comparing the buy and rent calculations is that home loans decrease and then stop, while a life-time renter will keep paying. Thus Step 2 doesn’t only matter for buyers but for renters.
Jayson November 4, 2016 at 09:07
Hi Mark. Yes, the inflation is definitely factored in across all expenses. And the conveyancing numbers are the most recent statutory ones (at least, they are at the time of writing this).
And I agree – how long you plan to live in a place is very important for the buy v rent decision 🙂
Quintin Schnehage November 8, 2016 at 23:25
Hi Jayson – it looks as though the capital gains field is broken. 🙂
ReplyJayson November 9, 2016 at 06:14
Hey Quintin! It seems to be working on my side – what are you seeing that has you concerned?
In case you’re worried about the ‘R0’ (some people have pointed it out) – just remember that there’s quite a large CGT exclusion for a primary residence (which I’ve taken into account in the calculation). So if you’re seeing “R0” as the CGT payable, it’s because your projected capital gains on the property are below that exclusion.
Not sure if that helps? 🙂
ReplyAnonymous January 5, 2017 at 08:29
This is great! It would be cool to have a slider to adjust monthly home loan payment up or down, and see how that affects things.
Replyraymondbc January 18, 2017 at 09:58
Thank you for the tool. I used the NY times one a couple years ago.
An additional feature I would enjoy, is a rental income feature. The house has a cottage which is rented out and the monthly income is R3500 and will escalate with rental growth.
ReplyAntoinette January 30, 2017 at 14:40
Very interesting thank you.
I have done my masters on this topic in SA and enjoyed the availability of your tool for inputs.
I have developed another model/tool. I am of the opinion that Homeownership will lead to the optimal tenure decision in vast majority of scenarios. I agree with several of your inputs.
Very important are the assumptions that a person does save if renting and that persons who do save are the exception in South Africa.
Keep up the good work of informing South African’s on this important decision
ReplyQuintin Schnehage May 27, 2017 at 04:56
This is such a useful resource. It’s been a huge help in my decision-making process.
One thing that would improve this so much for the use of a first-time buyer like me is the ability to save the settings somehow to return to them later.
ReplySiya August 9, 2017 at 20:16
Good day, Please confirm if it is advisable to buy R600 000 house with R950 levy, R500 rates and taxis. I am currently renting a flat and I am paying R4000 per month rent and R200 payment for refuse. I want to compare this over 5 years period. Please help. Thank you
ReplyKeith Davies August 21, 2018 at 13:37
Great tool! One thing to consider adding is an income section where for example you can rent out a cottage or a room on the property (in the case where you own the property). Similar outcome can by achieved by changing the interest rate (essentially the income is offsetting the interest cost). But would be good for it to be more explicit.
ReplyAnonymous January 24, 2019 at 13:48
This is one of the coolest calculators I’ve seen, thanks, and well done!
Love the “tipping point” idea.
As a property investor, when it comes to the extraction of cash from the investment, I would love a similar calculator comparing the extraction of funds from an access bond from a rental property vs paying it off and extracting the rental income.
Reply