When I just started working, I was amazed at how so many of my colleagues could bend their knees under the weight of a boulder of a bond just to own a home. The few of us who rented definitely had more spare cash to enjoy every month. Until someone pointed out (what should have been obvious) to me what happens to your rent at the start of every year and continues to do so for the rest of your life, while your home loan instalment stays fairly stable for 20 years and then disappears.

Our Renting or Buying a Home calculator illustrates this point. Yes, we’re not comparing apples with apples here, as rent is an expense with no reward other than a roof over your head for a month, while your bond repayment is an expense linked to the reward of owning a property somewhere in the future. But the calculator can show you instantly:

• how your rent will increase over the years
• the instalment on a bond amount that’s appropriate to your level of income
• the up-front costs associated with a property purchase

(If you don’t want to purchase such an expensive property as the amount for which the calculator shows your income may qualify, our The real price of property calculator allows you to enter your own amounts for the price of the property and the amount of the bond that needs to be registered.)

Many disciplined investors don’t buy the ‘as safe as houses’ investment adage, though. They prefer to rent for the rest of their lives (or until they have saved up a large enough deposit) and invest the amount by which a bond instalment exceeds the rent that they are paying.

If you download the Renting or Buying a Home calculator, you’ll see it will take approximately 12 years before inflation causes rent of R4 000 per month to catch up with a bond instalment on that same property worth, say, R940 000 (Cape Town prices). That’s assuming that the bond applicant earned R30 000 p.m. to qualify for a 100% home loan at the bond rate of 10%, and that rent increases by 7% per year.

In the scenario above, the tenant investor will therefore have excess money to invest over 12 years. By ‘excess’ we mean the difference between what her bond repayments would have been and the rent she actually paid. If she invested all the money that she saved by not buying a property, including the up-front costs related to the property transfer and bond registration, and that investment yielded 11% per year after tax, she can expect her investment amount to be worth more than R1.1 million after 12 years.

But there are other expenses which the calculator does not show. Tenants normally do not have to pay maintenance and rates and taxes, which could be substantial. Let’s assume these additional ‘homeowner costs’ start at R20 000 per year and increase by inflation of 6% per year. Because our disciplined tenant investor did not have these expenses, she could have invested these amounts in the same place where she earned 11% per year after tax, and these accumulated amounts would have been worth approximately R600 000 after 12 years. That leaves her with a total investment lump sum of about R1.7 million after 12 years of renting and diligently investing all the money that she saved by not having to pay bond instalments, the up-front fees of a property purchase, rates and taxes or maintenance.

It may look as if tenants have a point – until you look at what a home owner’s property may be worth after 12 years. If we assume that the capital value of property grows at 7% per year, the R940 000 property should be worth just over R2.1 million after 12 years.

This is a very specific scenario, and by changing a few assumptions or by choosing a very specific investment term, we could make either the tenant or the homeowner look like the cleverer of the two. The important points to remember are:

• Think long-term when you make a financial decision.
• Understand all the risks and future expenses associated with your decision.
• Don’t underestimate the power of either inflation or compounded investment returns.
• Be careful of sweeping statement. Do the calculations.

  

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