Buy or Rent! Which is a Better Investment?

To Buy or Not to Buy – That is the Question

Based on economic research, experts believe that the price of houses will increase by only around half the inflation rate over the next five years.

But how would buying a property with 100% equity compare to buying with a 100% mortgage bond, as opposed to renting the same property at a market dependent rental price?

In other words, which of these investment options would save you the most money or yield the greatest return on investment (ROI).

Buy, Borrow or Rent

Home equity is calculated by subtracting the mortgage balance you still owe on your house from the market value of the house, which, according to economists, will increase or appreciate over time. Therefore, in a hypothetical situation where you have 100% equity in your home, you would own the property in full, after paying for it out of your own pocket.

On the other hand, if you don’t have access to this calibre of ready money – as is the case with most of us – you could take out a mortgage bond, which is essentially a loan to finance the purchase of your home. How this works is your new home serves as collateral, so the bank can repossess it, sell it and keep the cash, if you don’t pay back the loan, with interest of course.

Subsequently, in a situation where you take out a 100% mortgage bond, you would receive a loan amount equivalent to the market value of the home you want, then you would purchase it with this. Thereafter, you would pay back the loan via monthly mortgage payments, at a variable interest rate.

Weighed and Found Wanting

Financial analysis shows that if you were to buy property with 100% equity and sell after 5 years, not only would you be getting a roof over your head, but it would also likely yield a significant cash flow for you. This makes sense, considering how property has been known to appreciate over time.

In contrast to this positive outcome, estimates show that buying a property with a 100% mortgage bond would likely result in an excessive outflow of cash from your precious piggybank. This too seems realistic, as you would have to repay the loan with interest.

From the perspective of economics, taking out a mortgage bond for the purpose of owning a property after 20 years of mortgage payments, would probably result in you losing more money, than if you were to simply rent.

The House Key to Motivation

Your motivation for wanting to buy rather than rent may be that you don’t want to inadvertently make the landlord rich or ‘assist’ them in paying off their bond, thereby helping them become a proud homeowner, while you remain a ‘property-less’ renter.

Then again, from an economic stance, buying property with the help of a mortgage bond would mean you are making your bank even richer, out of your own rapidly emptying pocket.

So, overall what sort of returns can you reasonably expect from each of these investments? Simply put, a rand received today is worth more than a rand received in 5 years’ time.

Truth is Stranger than Estimation

Clearly, there is little difference between renting and buying with 100% equity. However, once you begin to borrow, you are likely to make a greater loss.

However, considering how changeable the residential property cycle is, who’s to know if rent prices won’t suddenly shoot up over the years or, if your property won’t depreciate, leaving you as either an eternal tenant and penniless at that, or the owner of real estate of little worth. Conversely, perhaps your property will be worth a small fortune in the future, making all those years of mortgage instalments worthwhile.

In closing, one must remember this is a purely financial analysis. In reality, consumers don’t always make rational decisions, while some circumstances are simply beyond one’s control, and even economists can’t deny this.