There are proponents on both sides of the fence where the much debated topic of buying versus renting is concerned, with only a negligible few occupying a position in between.
Analysts, gurus and those who claim to be in the know, often point an accusing finger at property prices being a barrier to entry for new property owners. They keep speaking about ‘affordability’ and ‘interest rates’ and a whole bunch of factors out in the ether that creates a ‘nearly unbridgeable’ gap between the haves and the have-nots. This type of talk only serves to create the notion in many people’s minds that they are relegated to the ranks of non-owners for time and eternity.
It is quite disturbing that many of these experts tend to forget that renting also costs money, that property is not an instant gratification purchase and that purchasing property is no different from any major purchase – it has to be planned.
For most gainfully employed people who earn an average salary, the bottom line is that renting is only a good option if it is for a very limited, predefined period, if you are precluded from buying property by law (i.e. insolvency, administration etc.), or if renting is part and parcel of your property acquisition plan.
The renting spiral
Renting can become habitual. You sign a lease for a year, and in exchange for contributing towards somebody else’s mortgage, insurance and rates and taxes, you have a roof over your head and security for a year. After the lease expires, you may sign for a second year at an increased rent and, in exchange for a roof over your head and security for a year, you continue contributing towards somebody else’s mortgage, insurance and rates and taxes. This renting spiral can continue its spin into perpetuity.
For as long as you are in the renting spiral, the owner of the rental properties you occupy will enjoy a well subsidised mortgage, the increasing fruits of capital gain and a steady growth in equity. By contrast, you as a renter will have absolutely nothing to show for the money you spent over the years.
Once you get caught in the renting spiral, it is difficult to get out. The R 4,000 you are paying for the small three bedroom apartment in Fourways is – in all likelihood – some R 3,000 less than you would have had to pay if you had bought the place, and leaves you with little extra to stash into a savings account.
If this is you and you are serious about getting out of being a renter and into being an owner, take heart. It can be done. But, it will require some sacrifice and some careful planning.
Escaping the renting spiral
Escaping the renting spiral will require that you plan for the day when you will be able to stake a claim to your own personal pad. It means that you will need to set yourself a financial savings target to be achieved three or five years down the line. The money saved can then be used to pay legal fees and to make a deposit on your first home.
Key here is to save as much as possible, and saving as much as possible will involve some personal sacrifice:
1. Reduce the rent you are paying by at least 50%. This can be done by moving to a smaller place, or by taking in flatmates or boarders, or going into a commune. Your R 4,000 rental can then easily change into a R 2,000 rental, leaving you with R 2,000 to stash away.
2. Avoid car debt. Many young people make a bee-line for a shiny new car when they start working instead of keeping the jalopy they used at university or college. Even a small new car can, insurance included, take a R 2,000 to R 2, 500 bite out of your after tax earnings.
3. Manage your lines of credit. Store cards, credit cards and overdrafts are good facilities to have if these are managed correctly. Keep your credit facilities for emergency purposes and, when you use them, do not spend more than you can comfortably afford to repay in full when the balance falls due. In this way, you will avoid paying interest. This could mean an extra R 100 or more per month, depending on your spending habits.
4. Dine in not out. Considering that a take-out costs twice as much and dining out three times more than dining in, you can save between R 400 and R 500 per month by dining in.
5. Budget. Draw up a monthly budget and stick to it. This will help you eliminate waste.
6. Don’t drive unnecessarily. Fuel has become very expensive. When you go to the shops, compile a list and get everything at once. Try to do your shopping on the way back from work or on your way to or from a friend’s place. It will cut back on unnecessary fuel consumption.
This list is not exhaustive – you can easily expand on it over time. When you start adding the potential savings in the scenario above, you will find at least R 4,500 becoming available per month. If you saved the R 4,500 per month during the first year, R 5,000 per month during the second and R 5,500 per month during the third year, you will have put away – interest excluded – at least R 192,000.
This will make a serious dent in the price of a start-up property.
To buy or rent?
If you can muster the courage and the self-discipline, buying offers much more rewards than renting – both personal and financial. In spite of the high price tag attached to properties and interest rates that have been creeping upwards, buying a property is still an attainable objective…but only if you plan.