by Geoff George Paxton

Created on: September 07, 2007   Last Updated: March 17, 2011

To rent or to buy? That is the question!

I advise renting only when circumstances indicate that you will not be where you are for very long.

Look at the parameters around renting.

The rent you pay will probably be about 1% of the gross value of the property. The renter is usually responsible for the various amenities, water, lights, sewage but not rates and taxes on the property (whatever they are called in your location). So, if a person who owns a house worth 500,000 (in any currency as an illustration) decides to rent it out, the rent will be about 5,000 per month. Doing this, he (or she, of course) is making the asset work for him, and apart from rates and taxes and any maintenance bills, he will show a good profit.

However, if he has a 20 or 30 year bond, he will barely cover the bond repayment, particularly considering maintenance and rates and taxes. If the bond is any shorter, he will ave to pay in quite a bit. The advantage to him is that, at the end of the bond, he has an asset. But, tenants are notorious at maliciously, or carelessly, damaging the building, so he will have other costs. And, if there are periods without a tenant, he will have to dip into his pocket quite deeply.

But, enough about the landlord. If the tenant pays starting at 5,000 per month, and escalating at 4% per annum, for 10 years that is over 720,000 nearly 1 times the value of the house. Had he saved that money he could have paid cash for the house. That is why I said, it only makes sense to rent if it is for short periods. (Other factors, such as bad credit-ratings, may make it impossible to buy with a mortgage bond.)

Look now at the parameters around buying.

Using the same 500,000 house, the following emerges, if financed using a mortgage bond:

• Capital: 500,000 term: 30 years interest rate 10% (illustrative) monthly repayment: 4,388 total cost: 1,579,630 interest paid to bank: 1,079,630. A good deal for the bank.

• Capital: 500,000 term: 20 years interest rate 10% (illustrative) monthly repayment: 4,825 total cost: 1,158,026 interest paid to bank: 658,026. Still a good deal for the bank.

• Capital: 500,000 term: 10 years interest rate 10% (illustrative) monthly repayment: 6,608 total cost: 792,904 interest paid to bank: 292,904. An affordable option, but still a good deal for the bank.

So, if you have to finance a house through a bank, either put as much in as a deposit up front as you possibly can, and pay as much per month as you can. If you can only afford to take a 30 year bond, then look for something less expensive to mangle an old saying, "Cut your house, to match your bricks."

When you have paid the bond off, you have an asset.

You have grown accustomed to paying a large amount to the bank every month, and perhaps your income has gone up. So, why not continue this? Now you have a few options, for example,

1.Refinance part of the house you have just paid for, and put tenants in. The rent will more than cover the repayments. Use some of that money, plus an affordable amount to pay a bond on a newer, perhaps more expensive home. In this way, you will quickly build a worthwhile property portfolio.

2.Sell the house, buy a new, more expensive one, and put the proceeds from the first in as a deposit, to keep the repayments under control.
So buying as opposed to renting gives you long-term financial benefits. Instead of enriching someone else, by renting, you are building for your own future. Go for it!

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