Buying better than renting – with one exception

Most of the time, it is a better investment for South Africans to buy rather than rent property. One exception is the extreme case where high interest rates hurt a household’s budget.

This is feedback from Lew Geffen Sotheby’s International Realty CEO Yael Geffen, who told Daily Investor that the answer to the question “buying versus renting” is not straightforward.

However, “for the most part, it’s always better to buy, for myriad reasons”, she said.

First, property is one of the most stable investment sectors in the world. It’s also the largest, and there’s good reason for that.

Geffen said that real estate is a tangible asset, especially in times of global political and economic uncertainty. 

“While property markets may fluctuate over the short term, in all but the most exceptional circumstances, real estate values at least hold their value in the medium term and usually deliver significant ROI as long-term investments,” she explained.

“Entire fortunes can be wiped out in minutes if wealth portfolios are heavily weighted towards stocks on that one bad day when the market happens to have a bad case of heartburn.”

However, she said this changes if interest rates, which are currently at a 15-year high, are in play.

If interest rates are adversely affecting your household finances, putting you at risk of foreclosure, bankruptcy, or being stuck in a debt trap that will take decades to escape, be proactive about selling and getting out before your bondholder forces this on you. 

“Once you’ve sold, invest any profits, rent a home and wait for the interest rate to come down a bit,” she said. 

“When that happens, put those savings towards a hefty deposit on another house that doesn’t stretch your finances as far as the bond that put you over the first barrel.”

Geffen said the other rent-over-buy scenario particularly affects first-time buyers. 

“If you need anything close to a 100% bond and the monthly repayments are at the limit of your budget, hold off!” she warned. 

“Rent for a year and in that time save every penny you can towards putting down a sizeable deposit on your first home.” 

“The higher your deposit, the less you’re borrowing from a bank, and interest rate changes aren’t as painful on smaller bonds than those chunky ones that give you the swanky house but make your eyes bleed every month when you see that instalment leave your account.”

Geffen outlined the benefits of buying and renting:

Buying:

• Bricks and mortar equity grows over the long term.
• Real estate can provide a significant source of passive income through rentals, income that might cover mortgages, rates and taxes, maintenance costs, and even periodic site improvements.
• Legislation and directives around taxation change constantly, leaving investors uncertain from one month to the next whether the value of their investments will plummet. Property is an immovable asset that, over decades, has demonstrated a global increase in value.

Renting:

• Emigrating families should sell their properties months before their planned departure date. This ensures enough time to find the right buyer at the right price and complete the transfer. Moving into a rental property is also a good psychological transition to prepare for the departure.
• Rent small while you’re saving for a lump sum deposit on the house of your dreams. There’s no point renting a Sandton penthouse or a Clifton beachfront apartment if accruing a deposit is your goal. Living frugally for a while will pay big dividends.

Faced with the country’s current high interest rates, many South Africans have held off buying property and opted to rent instead. However, Geffen said there is no reason to delay. 

“The interest rate always moves in cycles, and whether it’s up or down, the property market remains active. If you have the means to transact, do it. There are always willing buyers and sellers,” she said.

“We’re on a more positive path as a country than we’ve been in 15 years. There’s no reason whatsoever to delay any plans for property transactions in the medium term.”