The question of whether to buy a home or pay rent is a significant debate in the realm of personal finance. Advice from parents and grandparents often leans towards purchasing a home and “not paying off a landlord’s bond.” However, it’s crucial to thoroughly analyse the factors involved and consider individual circumstances before deciding. In this blog, we’ll explore the advantages and disadvantages of both options to help you determine the best course of action.

According to my calculations, buying a home becomes more favourable if you plan to reside in the property for eight years or longer. However, it’s important to note that long-term returns on residential properties have not been particularly impressive. Additionally, one must consider the transaction costs of buying and selling a home, such as agents’ commissions, lawyers’ fees, and transfer duties. These expenses can significantly impact one’s financial resources. That means you should plan for an emergency fund that is just for your home. There will be unforeseen expenses, and having a specific fund to cover them will be very helpful in the early months of home ownership.

Furthermore, the costs of homeownership are consistently on the rise. Property taxes are increasing, while service delivery is deteriorating. Municipal taxes, including refuse removal fees, are escalating at a rate higher than inflation. Moreover, there are inherent risks associated with property ownership. Interest rate hikes have adversely affected numerous property owners, with some regions, such as Gauteng, experiencing property prices lower than those seen a decade ago.

On the other hand, renting has its own set of risks. Dealing with negligent landlords who fail to maintain the property can lead to numerous headaches. Additionally, the issue of load shedding, which has become a common occurrence in many areas, poses challenges. Landlords that are unwilling to invest in backup solutions may leave tenants in the dark. Renting can also result in more frequent relocations, leading to disruptions and inconveniences.

For individuals planning to semi-migrate or emigrate, it is advisable to take time before purchasing in a new location. Renting initially allows for a period of adjustment and exploration, enabling a better understanding of the area and determining if it is the area for you. In addition, this approach provides flexibility as you can try a few different areas until you are comfortable. Alternatively, if you realise that you have made a mistake by changing countries or cities, you can more easily relocate as you do not have to sell a property before leaving.

An alternative to home ownership would be an investment account that pays your rent. You can accumulate a substantial sum over time by diverting the funds that would have been allocated towards a mortgage payment into an investment. Eventually, the fund will be large enough to pay an income that covers your rent. The costs of an investment account can be much lower than the cost of home ownership, and the potential returns could be much better. A simple, balanced unit trust or balanced ETF would be ideal for this type of investment account.

In conclusion, deciding whether to buy a home or pay rent is highly subjective and dependent on your individual circumstances, financial goals, and preferences. Buying a home may be a viable option for those committed to long-term residency, provided you do your homework correctly and have sufficient financial muscle for emergencies. On the other hand, if there is a chance that you will change homes every few years and you value flexibility, renting may be the more suitable choice.

Remember that personal finance is about finding a balance that aligns with your unique goals and values. Whether you decide to buy or rent, it is crucial to thoroughly assess the advantages and disadvantages, consider your long-term plans, and remain informed about the ever-changing market conditions. Happy house hunting or renting!

Written by Warren Ingram

CFP®, Wealth Manager, public speaker, and author. Host of the HonestMoney podcast. FPI South Africa Financial Planner of the Year 2011.