When playing monopoly, it is usually the person with the most properties that will outlast their opponents. But is this the case in the current South African property market? It is the age-old debate; do I rent and pay off somebody else’s bond, or do I rather buy at a slightly higher monthly instalment, just to be tied down with issues of maintenance, interest rates and capital gains tax? We explore the benefits of renting against the benefits of purchasing a property outright. It has to be said that both have their unique advantages and disadvantages, and it is critical that everyone weigh these in order to make an informed decision.
Research has shown that, in most cases, renting a property will bring down the monthly payment that a person will be liable for. The reason for this is the fact that one is not subjected to additional costs such as rates and taxes, estate levies, external insurance and overall maintenance of the asset. This would mean that one is more likely to live in a higher-valued property on a rental basis, than what you would be able to do if you were to purchase it outright. Renting also reduces the long term commitment towards the property as, in most cases, you would only be tied down for a twelve-month period. With this increased mobility, one can be more selective about where you want to stay – as you could move as often as once a year, if you wanted to. That would be ideal when travelling a lot for work, or if you are planning on semigrating (moving to a different area within South Africa) or emigrating (moving abroad completely). There simply is no better way to test uncharted waters of a new suburb, than by renting prior to committing to the area through purchasing.
Seeing as the monthly costs are lower when renting, this would free up cash flow that could be directed towards your lifestyle. Additional disposable income could also be pushed into other investments that may prove to have a quicker return-on-investment, than what a property might have – which is known to yield results mostly in the long run. Apart from the opportunity to spend the additional funds towards one’s lifestyle, renting within a development can bring other benefits, depending on the landlord that you select. Some developments, like The Precinct Luxury Apartments in Midrand, offer free internet services, free gym classes, free arts-and-crafts lessons, free tennis coaching, free swimming lessons and free hip-hop dancing classes for the little ones within the monthly rental. A landlord could easily allocate funding towards these activities when one considers a large development with many units contributing towards the lifestyle activities. It has to be said though, than one would have to choose your landlord carefully when wanting to access these free lifestyle activities as it is not a standard within the industry.
The last benefit to consider when renting a property, is the current apartment-scenario within the South African property market. Most first-time purchasers settle on this investment type without considering the long-term repercussions. With developers releasing over 8,000 apartments on a yearly basis in Gauteng alone, investors would compete with an over-saturated market. This would mean that you would be competing with newer developments, with fresher fittings and finishes in an ongoing basis. You would also compete directly with large-scale developers where their clients aren’t subjected to transfer duties, as purchasers would be when purchasing your property. Another factor to consider, is that during times of financial distress, property values tend to take a downward cycle – making your ability to sell it and converting it back into available cash, much more challenging if you do not want to incur a substantial capital loss. A rental tenant is free from these concerns, and of the stresses of having a property on the market for long periods of time.
Having said that, one should carefully consider the advantages of purchasing a property, as this is one of the easiest investments that banks would finance, and one could essentially make money against borrowed money. Having an asset like a property, could provide you with collateral – should you wish to loan additional funds towards your next investment. Research has shown that property can be a very forgiving investment, if you are able to retain it for long enough. It is clear that it is more of a long-term investment, and rule-of-thumb is that if you stay in the property for more than 15 years, one should make a profit with the additional benefit of having a home to live in.
If you own a property, you could customise it to suit your individual needs. Rental properties are generally not open for your personal customisation, as most landlords would never agree to a tenant altering their asset on a permanent basis. There is no doubt that purchasing land within the urban development framework is expensive. This is why most developers opt to build as many units as they can on a property – to justify the cost of the land and to maximise the profit from the initial investment. This is one of the main reasons that the South African property market is over-saturated with small apartments. First-time investors might find this an attractive option, without realising the long-term consequences of having to dispose of a property within such a saturated market. These individuals should consider investing in cluster developments. These units are generally larger and more expensive, as there are fewer opportunities for the developer to make their money back – but it does not compete with the over-saturated market of apartments. For first-time homeowners, cluster developments might be the best solution to purchase a property, that is not as expensive as a house, yet it still brings the benefits of having more space to live in. As purchasing a cluster could be seen to be more expensive than purchasing an apartment, one needs to remember that it is easier to outgrow a small apartment in the short-term, which goes against the primary rule of investing in a property; to be in it for the long-term.
Unfortunately, the property market is not as simple as rolling the dice and landing on most highly valued properties. Unlike Monopoly, one needs to carefully consider all the advantages and disadvantages prior to taking on the responsibility – as research has shown that it will be a long term commitment, which can be both devastating and profitable; depending on how well you play the game.