11 pros and cons to consider when buying vs. renting a home
The recent turmoil in housing markets worldwide coupled with increasing mortgage stress locally has many potential home-owners wondering about which is better, renting or buying?
This debate is not something new and while there are definite long-term advantages of owning your own home, not everything is a bed of roses, says Piet van der Walt, MD of Sanlam Home Solutions.
A major determinant is affordability. “For starters, access to credit has become almost impossible without having saved up to 20% of the value of the home you want to buy.
“Other factors that may to a large extent play a role in the decision to buy or rent would be the individual’s credit profile and increasing uncertainty over employment.”
Van der Walt says a decision like this should never be taken without professional guidance. “At Sanlam Home Solutions, for example, we have professional consultants who have access to desktop valuations, credit bureau information, current insurance portfolios and collateral values, which help them to assess prospective buyers’ ability to qualify for a home loan. In addition, consumers have access to professional financial advisers or brokers who can do comprehensive financial needs analyses in respect of clients’ current and future financial needs.”
Van der Walt says that what is crucial in rethinking the buy decision is that you cannot take a short-term view when investing in residential property. On the other hand you should not even consider the option of buying when your debt ratio is not within norms.
Van der Walt lists the pros and cons for buying vs. renting:
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Buying a home |
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Pros |
Cons |
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Building Equity and personal wealth |
Not very liquid asset – especially when economy is down and the owner wants to sell quickly |
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Good performing long-term asset type from investment perspective |
Cost of ownership – rates and taxes, insurance, maintenance, improvements, security etc |
|
Sense of belonging to community, stability and security |
Responsible for maintenance and tenure |
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Credit profile – improve ability to access funding as track record of repayment of loan will benefit individual |
Possibility of loss of equity and foreclosure – risk in economic recession etc |
|
Free to within building regulations change décor and landscaping etc |
Less mobility than renting – time to find buyer linked to state of industry/economy |
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Not dependent on landlord to maintain property – own responsibility |
2nd or investment properties can become cost burden in economic downswings and can lead to financial ruin in extreme cases |
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Best tax-free saving if additional payments are made into loan account |
Cost of life and disability cover required to pay outstanding bond in case of death/disability |
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Respect and recognition from society – human needs hierarchy |
Location most important factor when investing in residential property |
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Property can serve as security for other lending purposes e.g. starting own business |
Thorough planning needed before investment decision taken – location, location, location. |
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Inheritance value to family members |
Huge responsibility and possibly some sacrifice initially |
|
Paid equity and appreciation in value |
Liquidity and cash-flow considerations to be taken into account |
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Renting a home |
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Pros |
Cons |
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Flexibility to move in times of uncertainty – e.g. job instability or security or possible transfers/relocations due to nature of work/profession. Some rental contracts may however require a long notice period for cancellation. |
Paying off landlord’s debt on his behalf |
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Limited or no responsibility for maintenance of property |
Landlord reluctant to maintain property |
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Insurance costs – only content – landlord responsible for home-owners’ insurance cover. |
No equity/wealth creation |
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Renting higher value property than what you will be able to afford when buying – market conditions determine |
Little control over rental escalations |
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No property rates, taxes or levies payable – landlord responsible |
No guarantee of tenure after contract expires. |
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No home-owner association costs |
No return on investment |
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Other funds can be used for other investments – not tied up in equity in property and difficult to access |
Cannot offer as security for other lending purposes |
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Potentially/initially cheaper to rent than to buy – installment vs. rent |
Permission from landlord for any alterations/improvements etc |
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When relocating create opportunity to study market and not take hasty investment decision |
Rental increases annually normally linked to inflation – at one point cost to rent may break even and can even exceed cost of owning |
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No interest-rate risk – market conditions/ increases |
Deposits required by landlord, local authority |
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Good option if you don’t expect to be in one place too long. |
Can get caught in so-called rental spiral – never become a home-owner |
