Rent or Buy Property? The Endless Debate
I know what you're thinking; not another FIRE article on the pros and cons of property ownership versus property rental?
Well I'm not going to lie to you, you'd be right!
Feel free to abort at this point if you're sick of hearing this endless debate, I'm sure I'm not going to convince you if you haven't been already convinced by some FIRE bloggers who burn significantly brighter than me.
However (you knew there was going to be a but), I have been thinking hard about this subject for some time now and I have come to the conclusion that the answer to the Rent or Buy question is not linear, not black and white and not set in stone. It is a dynamic view that can change at several points in your life and I have concluded after much cogitating (good word), that the question is not; "Should You Rent Or Buy?" the question you should be asking yourself is "When Should I Be Renting And When Should I be Buying?"
Boom, Pow, Thwack, Poof. Yeah I said it, did I stutter?
Ok, hopefully my over dramatised preamble to my less than ground breaking theory got you reading this far. And if you did, you're already in too deep, there's no point turning back now, why don't you stick around whilst I try to impress you with my thought process? You will? Ok deal, I'll do my best not to disappoint.
Hold on to your britches, we're going in.
I'm from a working class family and was brought up in a typical suburban town in the north of England. We weren't wealthy by any stretch of the imagination but I never went to bed on an empty stomach and I always had shoes on my feet (even if mine said Gola when all my friends said Adidas or Nike). I realise now how lucky I was to have that kind of upbringing because it instilled in me the importance and value of earning a living and working hard for what you've got. We never went without what we needed but we often couldn't have what we wanted.
I lived in 3 houses growing up, the first I can't even remember as I was only there until I was 2. The second house though was a weird and quirky place in Halifax, a relatively run down town that had been rich during the textile industry golden era but fell on hard times after it became cheaper to manufacture abroad. The house was massive, and about as weird as it gets. It was part of a former manor house that had been split into probably 10 different houses. We had the end one which happened to also be the bell tower (spooky right), it was spread over 3 floors and if I remember rightly, it probably had 6 bedrooms. My dad was doing well at that time as an engineer and I guess they stretched themselves as an investment to shoot them up the ladder. This was Thatcher's Britain in the 80's so greed was good and home ownership was encouraged.
I think we stayed in that house for about 6 years when one day I went into the garden to play and spotted a big hole (I mean big) in the middle of the lawn. After structural engineers investigated, it was deemed that there had been some kind of cellar or series of passageways from the servants of the manor to move around unseen and this had collapsed. This was a big issue and the house was deemed structurally unsafe. The hole got filled in with rock and my Mum and Dad tried for a long time to sell the house as my dad's job had moved to Leeds. I don't know the total loss they made but I think I remember they sold that 6 bedroomed former manor house bell tower for R120,000 / $8,000 / £6,000. A quick internet search reveals that its current value is R6,400,000 / $426,000 / £320,000. Now its 35 years later and inflation will have paid its part but the house is still standing, so I think my calculation suggest my parents lost approximately.......A shit ton of cash.
As a result of this minor setback we had to move in with my my grandparents in Leeds for what I think was probably around a year. I assume my parents needed to save up and get a mortgage for another house and all that good stuff. Eventually though we moved into a 3 bedroomed ex-government owned house in the village my mother was born in near Leeds. I believe they paid around R540,000 / $36,000 / £27,000 for that house which gives you another indication of how much they lost on the Halifax house which was more than 3 times the size.
I grew up in that home for the next 10 years before I struck out on my own. My parents eventually sold that house after owning it for probably close to 20 years for R2,700,000 / $180,000 / £135,000 so about 5 times what they paid for it. Which is pretty good but I guess it's all relative as they just used that to buy another house which was of similar size and shape. My mother announced just this week that she has bought a bungalow, so I suspect this will be the last move they do. So apart from a year at my Grandparents place, my parents owned property their entire lives. I guess the property will be left behind as my sister and my inheritance. Neither of us need that money so I suspect we'll encourage them in some way to unlock their equity and enjoy the money in their retirement. A thorny conversation which still needs to happen.
I pretty much followed this approach through my own life. I bought my first house when I was in my early 20's and have slowly climbed the property ladder. I have owned 4 houses in the last 20 years each one bigger and more valuable than the last. The fundamental difference between my parents and I is Mrs H and I blasted that mortgage by heavily overpaying on it our entire working lives and then became mortgage free on our arrival in South Africa as property here costs less than half what it does in the UK so that was part of our FIRE Geo-Arbitrage hack and we were able to buy our current house in SA for cash.
So as it stands, we currently live in a fairly nice house in Cape Town, mortgage free for the last 7 years and the value is somewhere around R5,000,000 / $330,000 / £250,000. We took the strategy of buying a large plot for Winston the wonder dog and 6 bedrooms to accomodate all of our visitors form the UK. However, it's just Mrs H and I so there's no question it's a lot more than we actually need.
And I'm convinced now that the smartest thing we can do is to sell it
Up until now, there has been two main drivers to why home ownership was right for our lifestyle:
When you live in the UK, rents are much higher than mortgages and property inflation is massive, you can make a great return on investment on property and my first house was a great example, I bought it in 2000 for R550,000 / $36,000 / £27,500 and 4 years later it was worth R2,200,000 / $146,000 / £110,000. Obviously, I sold it.
Bank interest rates in the UK are super low so the returns on property are much greater than you'll get from any non-stock market investment (which would be high risk). It is still true to an extent in the UK that you'll never lose in the long term putting your money in bricks and mortar.
Unfortunately those statement are no longer true in South Africa. Our house price has probably gone up 20% in the last 7 years and I've spent more than that on renovations so it's effectively zero growth whilst we've been here. Conversely, I can get 8% annual return today in a SA bond ETF. Inflation is in my head still around 4.5% so I'd be protecting the money from inflation and growing it by 3.5% year on year with almost no risk.
Now let me math that into perspective for you:
Our home is worth R5,000,000 / $330,000 / £250,000 but it's not increasing in value and is unlikely to in the short to medium term given the current economic crisis in SA. Inflation is chipping away at it's real value at 4.5% per year (Which would only really apply if I left the country but never say never to that.)
Due to the power of the sun and general poor quality of materials and workmanship on household maintenance compared to the UK (sorry, but it's true), 13% of our annual expenditure goes on household maintenance (not renovations, maintenance) which equates to around R100,000 / $6,600 / £5,000 per year.
So the true cost of owning my home before I consider any building insurance, levies etc. that I might not pay if I was renting is roughly R325,000 / $21,600 / £16,250 or R27,000 / $1800 / £1350 per month.
Remember that number.
Now to the argument of renting
Firstly I sell the house and lets say I end up with R4,500,000 / $300,000 / £225,000 after all costs, which i think is pretty generous. I immediately place that into an SA bond ETF which yields an 8% annual return. I know have an income of R360,000 / $24,000 / £18,000 for rent money
I also save the household maintenance cost of R100,000 / $6,600 / £5,000 per year.
I'm not going to add in my losses on home ownership through inflation loss as lets assume I have rent increases for the same amount. That is also very generous but hey, I'm a generous guy.
So what I end up with is a inflation protected income for rent of R460,000 / $30,000 / £23,000 a year, or R38,000 / £2500 / £1900 per month
Now let's make sure we're still on the same page, I could do that tomorrow (Assuming I could find a willing buyer), it's not costing me any more than my cost today and I'm not spending the money from the value of the house, I'll still have R4,500,000 / $300,000 / £225,000 in the bank, and it will still be inflation protected.
Now to the important stuff, what can you rent in Cape Town for R38,000 / £2500 / £1900 per month?
How about this cheeky little spot on the mountain-side overlooking the sea in the upmarket town of St James for just R30,000 / $2000 / £1,500 per month:
Or check out the view from the stoep (Veranda/Balcony) on this 5-bedroom abode in trendy Llandudno also a snip at just R30,000 / $2000 / £1,500:
Or for my final example, how about some loft -style living right in the heart of the city for R35,000 / $2,333 / £1,750 per month:
Now I like my house, its nice, but compared to the 3 whoppers above? It doesn't hold a candle.
Yet it's costing me more! If something goes wrong, I have to fix it, and it's not increasing in value. You will notice that two of the properties above are well under my theoretical budget which would create a saving of R96,000 / $6,400 / £4,800 per year, that would pay for a pretty spectacular holiday to say, Hawaii, Australia or maybe Brazil all for free if I compare it to my costs today.
For my final proof of why home ownership was right for us but now is not serving us anymore, let's discuss the hassle-free nature of renting.
Picture the scene, Mrs H has finally agreed to retire and we are literally free agents, no kids, no property and enough personal possessions to put into a standard storage room for a few hundred rand a month. Let's not discuss Winston the wonder dog right now, but let's say he's not getting any younger ( you know what I'm saying).
We rent fancy house number 1 above ona 12 month lease. At month 11 we give notice to leave and we start planning our 3 month trip. North America this time, we plan to start in Vegas, travel through to New Orleans (our favourite city in the world) for Mardi Gras, through Chicago, up to New York, Down to Miami, take a month island hopping in the Caribbean and then back home. We're not paying rent or household bills for that time so we have R38,000 per month plus our normal monthly budget of R62,000 per month. So over three months we have a budget of R300,000 / £20,000 / £15,000 to pay for flights, AirBNB Accommodation, hire cars and food. I'm pretty confident I can make that work and do you know what? It hasn't actually cost me anything more than I spend today yet.
At the end of month 2 of our adventure, we get on the interweb and find house number 2 from above and arrange to collect the keys on the day we land back in Cape Town. We pay a man with a van to empty the storage unit and meet us at the house on our arrival. A couple of hours later, we're in our new home for the next 12 months and we can enjoy Cape Town and catching up with our friends for the next 9 months whilst we decide on where in the world to go next.
Repeat until it gets boring.
And that's how I see our life being in a few years time. I'm still only 44, even if it takes 3 more years before we can start living like that, I'll still be years away from normal retirement age.
I'm sure I can find a million reasons that to show that plan is flawed but if I look hard enough I could have done that with retiring 10 months ago and still have been working and most probably being bloody miserable.
I know travelling isn't for everyone and you might just love pottering around your own little pile that you've made unique to you and it has every mod con you want and need and you would never consider selling it.
Awesome! you found your retirement purpose, you do you, I couldn't be more pleased for you.
For me however, what I've just described above feels like a serious life hack and massive upgrade to the way we live today, and I can have it, I just have to make it happen, which is easy, no?
I'd love to hear your views on this perpetual debate and what you think of my future life plan (subject to approval form she who must be obeyed). Let me know what you think in the comments.
Until next time, keep living.