Question:

I've always had an extreme aversion to all forms of debt.  As a result I've never owed anyone a cent in my life even though I'm in my late thirties.  I've built up a large emergency fund to ensure I stay out of debt and I always save up before I buy something, even for a car (for which I have money saved up should I need to replace it).  I have a retirement annuity into which I deposit 15 percent of my salary each month.

My question is this: because I'm unwilling to be bonded by debt I cannot afford to buy property.  Is it a mistake to rent in perpetuity?  Should I get over myself and get a mortgage?  Is property a good enough investment to justify the amount of interest one pays over the life of the loan?  Will the value appreciation make up for the exorbitant cost of the loan?

Anwer:

Wow! You are really doing everything right. No debt, an adequate emergency fund, disciplined retirement savings and the willingness to delay instant gratification by saving up and buying cash. I truly admire your common sense and self discipline. On top of that you now ask a great question.

So, to rent or to buy?

The usual way to look at this question would be to say you could buy a property and pay it off over 20 years. You could also rent the same property over the period. Since renting costs less than buying, you could invest the difference. We could then compare the value of the property and the value of the investment at the end of 20 years and conclude that whichever gives us a higher value is the better investment.

Simple, right?

The problem with this approach is that we need to make assumptions for all the variables. Inflation, interest rates, maintenance costs, rental costs, growth in the value of the property and investment returns all need to be forecasted for the next 20 years. A small change for any of these variables could change the ultimate conclusion. Also, forecasting the future is a guess at best and it is usually better not to base decisions on assumptions if it can be helped at all.

So, what to do?

Well, I did run some numbers and in principle I can offer the following comments:

• There can be no definitive answer. In some instances you will be better off buying and in others renting comes out on top.

• Renting will have a higher value when:

o   Investment returns are high.

o   The monthly cost of renting is low compared to the monthly cost of buying.

• A great amount of self discipline is required. Renting may not make much sense, financially, if you don’t save the extra cash you have because you decided to rent rather than buy.

Still undecided?  I’m not surprised.  Perhaps the following will help…

The house you live in is not an investment

Things like houses and cars are called lifestyle assets. We have them around because we want a certain lifestyle, not because they will earn an investment return. As an example, assume you bought a house for R1-million and sold it later for R1.2-million. You made a profit of R200 000. The only problem here is that you now have nowhere to live and will need to use the money from the sale to buy another house, which will probably cost R1.2-million, leaving you back where you started.

Pros and cons of buying

Buying provides you with a sense of ownership, the freedom to make alterations and, very importantly, forces discipline as you have to make a payment every month.

Unfortunately it does mean that you have to pay large amounts in interest. It also reduces your flexibility because you are obliged to make a large payment every month and you have to remain at the same address for a number of years (the costs and inconvenience involved in buying are substantial so you would be better off not moving too frequently).

Article continues on page two: pros and cons of renting and the "right" answer to the question...