To rent or to buy

Most South Africans have little choice about whether to rent or to buy a house. Sometimes both are beyond their means. There are not enough houses to rent and they cannot afford to buy decent houses. But things are opening up.

The government has announced that it is going to guarantee housing loans for those earning from R3 501 to R15 000 a month under its Finance Linked Individual Subsidy Programme (FLISP).

This group was excluded from the housing market because they were too rich to qualify for RDP housing but too poor to get loans from banks.

The market is now open, but the houses might not be there. Outstanding housing demand is about 2.1 million units.

With the government developing rental accommodation and houses for sale, the question becomes, which is better?

There are several calculators on the internet which one can use but I found the simple rule of thumb suggested by Michael Bluejay to be the most appropriate for most South Africans.

It is very simple. He simply suggests that if you multiply the rent you pay today by 240 and find that the amount is enough to buy a house, then buy one.

In simple language if you are paying R900 rent at the moment and you can get a house for R216 000, it’s better to buy the house.

You might ask how does he come up with 240? It’s simple, 240 is the number of months in 20 years. Most bonds are for 20 years. So when you are paying R900 a month you will pay R216 000 in 20 years.

But in real terms, very few people pay that kind of rent unless they are sharing perhaps a single room. If you pay say R1 700, which is more reasonable, then this will come to R408 000. Are you sure you cannot buy a house for this price?

Of course there are times when it is better to rent.

The same Bluejay says:

It is almost always better to buy a house than to rent. Renting is better only if at least one of the following applies:

• Your rent is lower than average—and you expect it to stay that way.
• You plan on moving in a few years.
• You're in a super-expensive housing market.
• You can get better-than-average returns from whatever you're investing your cash into.
• The house you would buy is a lot larger than what you would rent.

Once you decide to buy a house, my book shows you how you can save thousands. It is available here as a ebook and here as a hardcopy.