Buying vs renting property in South Africa – the winner is clear

Daily Investor compared buying versus renting a house in South Africa, and one option – buying – emerged as the obvious choice for building wealth.

This analysis focused specifically on properties bought or rented for the purpose of living there. In other words, investment properties were not considered.

Daily Investor compared buying versus renting a house for the purpose of staying in the property and calculated which option would be the best from a financial point of view.

To determine which option would be the best financial decision, two virtually identical properties were compared – two-bedroom apartments in Broadacres, Johannesburg.

The average price for purchasing this property was R953,000, based on a selected sample of actual properties with nearly identical specifications.

Assuming a buyer could finance the property with a 100% loan at the current prime lending rate of 10.50% with a 20-year repayment period, the property owner would have to pay a monthly instalment of R9,515.

Using BetterBond’s bond registration and transfer duty calculator, it was estimated that this property would have a total cost of R65,880 to register the bond and pay transfer costs.

Using data from the FNB House Price Index since 2001, the average residential property value increased by 8.13% per annum. The assumption was made that property values would appreciate at the same rate over the next 20 years.

The home buyer would also need to pay rates and taxes on the property, which is linked to the property’s market value.

The current rates and taxes were calculated to be R478 per month, based on calculations from the City of Joburg and were adjusted for the property’s market value over the 20 years.

The homeowner would also need to maintain the property, and as a rough rule of thumb, this was calculated to be 1% of the property’s market value.

This was then adjusted for inflation at the midpoint of the Reserve Bank’s target range, 4.5%. The starting maintenance was calculated to be R780 per month.

The wealth-building winner

In this example, the starting levy for the apartment was R1,500 and adjusted according to the SARB target inflation rate of 4.5%.

The current monthly rent (observed in the market) for the same spec property is R9,150 per month, which means it has a current average rental yield of 11.52% (from observed prices).

The rent on the property was kept at a constant yield and adjusted to the property’s market value over the 20-year period.

Alongside determining whether buying or renting is the better option, Daily Investor also compared the value of investing in the S&P500 over the 20-year period.

The R65,880 bond registration costs would be added to the rent payer’s wealth as a starting lump sum, and invested in the S&P500.

All additional costs incurred by the buyer would be added to the renter’s S&P 500 investment on an incremental basis and compounded at the S&P 500’s average 20-year return.

At the start of the 20 years, the buyer would pay R3,137 more than the renter per month. This means that, in the first month, the renter could invest R3,137 into the S&P500 every month.

As the rental expense increased, the gap between the buyer’s and the renter’s monthly payments decreased.

After one year, the rental expense would be the same amount as the buyer’s monthly repayment. After 5 years, the rental expense would be equal to the property’s monthly repayment plus all other costs.

From this point onward, all the renter’s expenses which exceeded the buyer’s were allocated toward the buyer’s wealth and were also invested in the buyer’s S&P500 account.

At the end of the 20-year period, the buyer would have a total wealth of R6.9 million while the Renter would have a total wealth of R4.2 million.

This means that the buyer’s wealth would be approximately R2.7 million greater than that of the renter, making it the clear decision for building wealth.