Should I Rent or Buy? – What does the maths say

Rent or buy

When I moved back to South Africa last year, I couldn’t understand the fixation on buying property. With mortgage rates around 10%, it just didn’t make financial sense.

There is of course the ill-informed – “paying someone else’s mortgage” argument, rather than the “paying a subsidized amount for the use of someone else’s asset, while letting them take the risk.” – I think it’s partly just living up to a normalized expectation.

Generally, Property is an asset class that grows. As rent trends upwards with inflation and mortgage payments stay flat, eventually, assuming you want to stay in the same area, the same size house, and so on, there comes a point where buying makes more sense.

The key for me, is when is this “eventually” – This is what I refer to as the decision point and it is largely driven by the sunk transaction costs when buying. At times, this decision point maybe 10 years, and if we move house on average every 6-8 years (I’ve historically moved a lot more, even an average of 5 weeks, for at least 3 years of the last 10) it makes more sense to rent.

Since the beginning of the year, interest rates have dropped by 40% in South Africa. I wanted to know where the decision point would be for me. I have 3-4 years left of Project FIRE40, so it makes sense to be within that time frame and so, I did what I do, I built a model…

Starting Assumptions and thoughts before diving in

  • CGT will not be liable in on the property if it’s your main home, but it could be charged on the equity. I’ve ignored this, as you may invest through an RA/TFSA or other tax wrappers. You also have to live somewhere.
  • An individual property is a far more concentrated risk that a diversified portfolio – there could be some massive unforeseen costs.
  • Models have errors and simplifying assumptions. – This means they are wrong, but they can be useful in informing decisions.
  • The sunk costs form the equivalent starting investment pot on the renter’s side, then the cash differential get’s invested.
  • Inflation is monthly for simplicity, realistically it would be applied annually.
  • If cash flow is a driving factor, I think it may be advised to rather buy less house.

Given my starting assumptions, you would need to stay in the house for about 4 years for it to make financial sense.

Closing thoughts

There are many other non-financial reasons to decide to buy or to rent and I have a philosophy of “We make good financial decisions to have a good lifestyle, not the other way round.”

For me – I am going to start looking at buying. This is something I was against before until the significant interest rate drops that have occurred. I’m nomadic by nature, so the hassle and sunk costs just didn’t make sense. Now they do.

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