Questions I get asked – Should I buy a house or rent?

I get asked this regularly. As if there is a singular answer to it. A glimmer of hope that I can make their decision to go one way or the other more palatable.
Let’s take a step back from the financial aspect and consider a personal development moment here. You always go without when you choose one ‘thing’ over another. It doesn’t make a difference which way you go, by purely making a choice to head in one direction, you are, effectively, denying or foregoing the other.
But back to this question at hand and please note this is my take, there are also others, read widely.

Does Your Home Represent an Asset?

Yes it does but… I am starting with this as I feel this requires some discussion.

What defines an asset – beside the dictionary definition. My view of an asset is something that pays you an income (1) or at something you own that can provide capital back to you when you ‘cash’ it out for you to make use of elsewhere (2). An asset can also take many forms, our argument here is around owning private property (A HOME) versus ALL other assets (including investment properties – which is a different form of a property investment).

My argument is that your home will do neither successfully as once you own a home you tend to always own one. This ‘locks’ up capital and it also costs you money to own.

Before everyone starts to shout, lets break this down:

When you purchase your home, most people do it through a bond. This means that you are taking on a significant debt that you must service for a period of between 20 to 30 years. Yes, one could pay it off sooner etc… but let’s just assume we are the standard Human with standard work that earns a salary for now. As such you don’t really have any asset for many years as the debt weighs heavily on the asset.

Then when you sell this home you are likely to buy another one. And… generally you purchase a larger home, so you bond yourself again, even if it is for a lesser or similar value as you increase your lifestyle.

Then when you finally get a chance to stop working actively (note I do not use the term retirement – a word we must forget), you stay in that home or, possibly, move to a smaller property. This, once again, doesn’t usually realise capital as you are not likely to buy ‘down’ thereby the same value rolls into this new property.

  • What about using your property for income?That is a great benefit, if you can rent a room out then that can definitely help to reduce your costs and pay off your bond quicker (still assuming this debt is in the picture). So if you do buy a property, look for that possibility as well – granny flats or similar.
  • What about loaning from your bond – ‘gearing’ your property?
    Absolutely, and this, for me is the one definitive benefit. A property is the main asset one can use to ‘gear’– take further loans with the bank taking your property as collateral (if you default the become the owner).

    However, I find this dangerous as I have seen people do this to buy cars or furnish their houses or buy other ‘things’ that are NOT assets. If you use this to grow a business or buy another property, then I am for it. Other purposes, not a great idea. Who wants to pay off a car for 30 years?

My view on owning a home:

A home is a legacy that you are creating for your children/descendants. Truth is in most western worlds people don’t own houses. In large Metropoles like New York, London, Tokyo, Zurich etc… the locals don’t own homes, they rent. Those that do own were bequeathed these properties from family. Often a few generations back. To afford to buy property, most expats, and locals, purchase outside of the cities not in them.

So, I am owning my home knowing that I will be leaving an asset to my children that they can then utilise for whatever end they deem fit. This provides them, and any further descendants of mine, a privileged base off which to expand their wealth (or squander it as many do – story for another day).

So now – what about renting?

Taking from above, lets look at these points raised and see how this impacts someone who is renting.

Firstly, no bond, so their capital is not tied into an asset, and they are not worried about interest rates or debt. Their indebtedness is attributed to a contract between themselves and the owner.

When you rent and an issue arises – geyser bursting, electric gate breaks, alarm stops working, pipes burst/rain damages your property etc… this is not for you to manage, you call someone to assist. Property costs are not your issue to deal with.

When you own your property, all the maintenance and repair costs are yours. When something breaks you fix it. To retain tenants, rental income, and value of a property, requires you to maintain your property. This is an ongoing challenge as things break all the time in a home and over time your house needs to be maintained. This is all capital and admin intensive.

But I am paying off someone else’s debt.

Yes, you are and as such you better be investing elsewhere while you rent your room/flat or home. If you are not creating wealth in another way, then you are wasting time.

Invest in shares, businesses or some other asset that has the potential to grow and offer you a payout or ongoing income. If you are not doing that then this decision to NOT buy, is a waste and you are making a choice that will detract from any wealth goals you may have.

To summarise this argument about owning versus renting:

A home, generally, won’t really pay you enough to quit your day job. A home, however, can create wealth but so can being careful with your spending and saving effectively in other asset classes. I feel a home provides a false sense that we are creating wealth for ourselves. And this leads me to a discussion around seeing a property as a ‘safe’ investment versus other asset classes.

Isn’t a home a ‘safe’ investment?

Remember that if you want to now sell your home, you need a willing buyer.

Currently, in Johannesburg, you are cashing in very little gains on properties, if any. In some cases, losses are being made on selling properties that have been held for long periods of time. There is never a guarantee that property prices will always rise over a short time frame. Examples abound worldwide – USA in 2008/2009 and now playing out in China where house prices in some cities are falling. Imagine you bought a house and then someone buys next to you for less then what you paid? Some are calling the UK property market the next to fall. An article recently in the FT Weekend highlighted how buying houses with cash trumps financed purchases. Even more reason to save for those goals.

Time frames are an important consideration in any asset class. However, your home’s main challenge is that, in general, it doesn’t pay you an income like other asset classes will. This income will provide some return even if values of these assets fall. In tough times, all assets suffer, and understanding how this impacts your assets is vital in making a sound choice on what it means to own an asset.

Once again, my view here is not to discourage or encourage a direction, it is rather to point out what it means to take one or the other.

What’s the point then?

When you make any financial decision, do it without emotion. In fact, make yourself an automaton that can look at the pros and cons and decide the best course of action within your allotted budget. I am being serious…

You must start with what you can afford. Taking all your goals and ambitions into account and build your future around that. I have seen myself and my clients fall into this challenge when you over-commit yourself with assets that you can just afford. Then as interest rates rise or work becomes harder, your affordability decreases thus pressurising you. In some instances, selling is then forced, and you then have to buy a smaller/more affordable home. This sale inevitably means losses and even in an amazing, planned world, things fall apart (COVID-19), so understanding consequences of choices is vital.

So, once again, my view is that you should make your choice based on a future where you realise that a home is not going to be something that will pay you out this big winning at the end. It is a legacy and often one, in our cultures, that goes to many family members.

Investments are done for a purpose. A home is there for stability and legacy.