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Cape Town - While there are sound emotional and economic reasons for both renting and buying a home, investing in home ownership does represent a long-term commitment to creating financial stability for yourself, according to Steven Barker, head of home loans at Standard Bank.
“Renting is a good option when you want a 'lock-up and go' lifestyle, or when you’re young and haven’t quite decided about putting down roots or even where you want to live and how you want to do that living," he said.
“So, the decision to buy a home is, in effect, a question of what life stage you’re in and how you’re choosing to acquire financial assets. There’s no 'should' or 'must' about it."
Barker said that the one significant advantage of buying a house, however, is that it’s a passive way of creating equity - or a financial stake - for yourself.
“We call it passive because, whether you buy or rent, you still have to spend money on a place to live. So, that’s money that leaves your pocket every month, regardless. It’s not discretionary. You have no choice about spending it," he said.
“In addition, it is money which you already know you can afford – because part of the reason you work is to put a roof over your head."
By contrast, investing in shares, for instance, uses money that is additional to your monthly expenses, he said. It’s a more pro-active investment because you have to do more than pay for the roof over your head to afford it.
“Also, when you’re paying off your own home, you get the benefit of both living in and using your asset. You don’t get the same benefit from any other investment. You can’t live in your shares,” he said.
Like all true investments, buying a home is not a short-term investment. In fact, usually, if you sell in anything less than seven years, the price of the property won’t have increased in any significant way versus the monies you still owe.
Also, the legal costs involved in selling and buying again are likely to negate any profit you may make on the property and will certainly impact on your ability to afford your next home.
There are rare periods when property prices escalate rapidly and you can make a substantial profit by selling. It’s worth remembering, though, that the next house you buy will also have gone up in price.
Barker said, however, it is important to get on to the property ladder.
“Once you’re on that ladder, buying another house becomes easier because you have the value of your previous house with which to trade. Without that value behind your name, it’s much more difficult," he said.
“Also, owning a home and paying it off properly gives you standing in the world of finance. For instance, banks are much more willing to grant you loans for other purposes if you can offer them the security of your property."
In other words, buying a house gives you access to other finance and other opportunities by means of which you can build wealth.
And, holding on to your house for ten years or more assures you of a significant return on your original investment and, because you’ve paid your bond for all those years, gives you a very good credit record.
Practical example
Joe presently rents a two bedroom apartment in Fourways. He is paying R12000 rent per month all inclusive. The apartment has just come onto the market and the owner is selling it for R930 000.
Should Joe buy it? What would he pay each month and how much extra will it cost him?
If Joe keeps renting the apartment from the new owner, his rental will continue to increase annually, in Joe’s case his rental agreement stated a 10% increase annually which means that by 2015, he will be paying around R14 500 per month.
If Joe buys the apartment, you will see that his monthly bond repayment plus his levy and rates and taxes, will still be far less than his total monthly rental amount would be.
So why should Joe, continue to pay off someone else’s home loan, when he could be paying his?
“On many different levels, investing in your own home is about investing in your own self- worth,” said Barker.
“Renting is a good option when you want a 'lock-up and go' lifestyle, or when you’re young and haven’t quite decided about putting down roots or even where you want to live and how you want to do that living," he said.
“So, the decision to buy a home is, in effect, a question of what life stage you’re in and how you’re choosing to acquire financial assets. There’s no 'should' or 'must' about it."
Barker said that the one significant advantage of buying a house, however, is that it’s a passive way of creating equity - or a financial stake - for yourself.
“We call it passive because, whether you buy or rent, you still have to spend money on a place to live. So, that’s money that leaves your pocket every month, regardless. It’s not discretionary. You have no choice about spending it," he said.
“In addition, it is money which you already know you can afford – because part of the reason you work is to put a roof over your head."
By contrast, investing in shares, for instance, uses money that is additional to your monthly expenses, he said. It’s a more pro-active investment because you have to do more than pay for the roof over your head to afford it.
“Also, when you’re paying off your own home, you get the benefit of both living in and using your asset. You don’t get the same benefit from any other investment. You can’t live in your shares,” he said.
Like all true investments, buying a home is not a short-term investment. In fact, usually, if you sell in anything less than seven years, the price of the property won’t have increased in any significant way versus the monies you still owe.
Also, the legal costs involved in selling and buying again are likely to negate any profit you may make on the property and will certainly impact on your ability to afford your next home.
There are rare periods when property prices escalate rapidly and you can make a substantial profit by selling. It’s worth remembering, though, that the next house you buy will also have gone up in price.
Barker said, however, it is important to get on to the property ladder.
“Once you’re on that ladder, buying another house becomes easier because you have the value of your previous house with which to trade. Without that value behind your name, it’s much more difficult," he said.
“Also, owning a home and paying it off properly gives you standing in the world of finance. For instance, banks are much more willing to grant you loans for other purposes if you can offer them the security of your property."
In other words, buying a house gives you access to other finance and other opportunities by means of which you can build wealth.
And, holding on to your house for ten years or more assures you of a significant return on your original investment and, because you’ve paid your bond for all those years, gives you a very good credit record.
Practical example
Joe presently rents a two bedroom apartment in Fourways. He is paying R12000 rent per month all inclusive. The apartment has just come onto the market and the owner is selling it for R930 000.
Should Joe buy it? What would he pay each month and how much extra will it cost him?
If Joe keeps renting the apartment from the new owner, his rental will continue to increase annually, in Joe’s case his rental agreement stated a 10% increase annually which means that by 2015, he will be paying around R14 500 per month.
If Joe buys the apartment, you will see that his monthly bond repayment plus his levy and rates and taxes, will still be far less than his total monthly rental amount would be.
So why should Joe, continue to pay off someone else’s home loan, when he could be paying his?
“On many different levels, investing in your own home is about investing in your own self- worth,” said Barker.
