Buying versus renting – Real-world example for South African investors

An analysis by Daily Investor showed that it is more profitable for investors to buy the house they live in than to rent and invest excess money into the JSE Top 40 or S&P 500.

A decision investors face in their lives is whether to buy a property or rent and invest the money they save.

Many practical reasons can influence the decision that is not related to the value of the investment.

For example, renting gives people more flexibility, predictable monthly payments, and the landlord handles all repairs.

Owning a home, in comparison, makes many people proud and gives them the freedom to make changes to the property and add value in the process.

There is also conventional wisdom that renting means you are wasting money by paying off someone else’s bond and that owning a home is a great investment.

However, it is not always the case. Buying a home can be a poor investment in some cases, and renting may be the smart choice.

To compare the investment case for renting and buying, Daily Investor used a luxury 2-bedroom apartment in Midstream Estate.

The property is for sale at R3.09 million and is also for rent at R22,000 per month. It makes it perfect for a real-world renting versus buying comparison.

We used a 20-year repayment period at the current prime rate of 9% for this analysis. The monthly payment amounted came to R27,801.53.

Using BetterBond’s transfer cost calculator, the estimated total transfer costs for the mortgage is R216,883.00.

There are many other costs associated with owning a property, including levies (R2,840), rates and taxes (R2,604), and maintenance (R2,575).

The total monthly cost for the apartment is, therefore, R35,820.

You do not have to worry about levies, rates, or maintenance if you rent the property. You would, therefore, save R13,821 per month.

You can invest the monthly saving in the JSE Top 40 Index or the S&P500 and achieve good returns over the 20 years.

• The 20-year return for the JSE Top 40 was 567%, equal to an average annualised return of 9.95%.

• The 20-year return in rand for the S&P 500 was 697%, equal to an average annualised return of 10.19%.

For this analysis, we assume that the same returns can be generated over the next 20-year period.

We also treated the transfer costs of buying the apartment as an initial investment for the renting option.

It reveals that the money you save by renting the property and investing it will give you a return of R8.078 million with the JSE Top 40 index and R12.415 million for the S&P 500.

South Africa’s house price index shows that residential house prices have appreciated at an annualised rate of 7.99% over the same 20-year period as the stock indices.

By applying the same assumptions as with the stock market, the value of the apartment at the end of the 20-year will be around R15.189 million.

The value of the apartment has, therefore, appreciated more than the invested savings over the 20 years.

It means owning a home and paying a mortgage can be a better investment than renting and investing in the JSE Top 40 and S&P 500.

It should be noted that many assumptions were made for this comparison. If these assumptions do not hold, the situation can change dramatically.

If the effects of inflation were considered, the case becomes even stronger in favour of the buying option as the mortgage repayment remains fixed and rental expenses increases in line with inflation.

The calculation becomes quite complex, and there are dynamics that change.

Daily Investor did this calculation, bringing the S&P 500 rental payer’s ending wealth down from R12.415 million to only R4.6 million, while the mortgage payer’s wealth remains at R15.19 million.

The table below shows the buying versus renting investment comparison outcome as explained above.