With an investment in property being the biggest financial commitment many will ever make, it’s hard to know when it’s the right time to buy, or whether to rent. Two property specialists share their advice.
“When making your decision”, says Brian van Wijk who owns and actively manages multiple Just Property franchise in Gauteng, “look at the current economic climate, your own financial situation and your long-term goals, but be aware that the sooner you get into the market, the better.”
“Typically, rent is around 0.75% of the value of a property. If you find a property priced at a point where your bond repayments would be close to what the market-related rent would be, you should seriously consider buying rather than renting,” says Van Wijk. “But make a list of the advantages and disadvantages, taking into account the long-term commitments, affordability, costs and flexibility.”
Shaun du Bois, a Just Property agent in KwaZulu-Natal, adds that short-term commitments should also be considered. “For example, if you are on a short-term contract in a new city, it would be best to rent: the cost of finance and transfer fees make purchasing a property unwise in almost all such cases. Buying and selling every few years makes little sense once you factor in all the costs. For many years, most of your bond repayment is interest and it is only further down the line that the capital starts to be repaid in any meaningful way.”
As Du Bois implies, buying property should be considered a secure long-term investment. But in our fluctuating economic climate is buying property still a good idea?
Is it better to buy in a growing economy or a declining one?
“If your goal is to own the property for a long time, don’t let your perception of economic conditions hold you back,” says Du Bois. “Over time, the value of your property will increase. It is wise to buy when you can get the property at the best price possible, with the potential of immediate equity in the property. Buying in a growing economy will result in immediate profit should you have to sell, which may not be possible if you sell in a declining market. However, a downturn in the economy does bring opportunities, hard as this truth may be. There are bargains to be had when sellers are in financial distress.”
“Remember Warren Buffet’s words: ‘Be fearful when others are greedy and greedy when others are fearful’,” says Du Bois. “If you wait for the perfect time, you may wait forever. One must be careful of becoming too fearful because of any temporary political or economic issues – property will always give good returns in the long run. At Just Property we are optimistic that the recent easing of interest rates will be repeated. A second decline will take some of the pressure off consumers. Already we see consumer confidence returning.”
What happens if interest rates begin to rise? Would it be best to rent an affordable home, take the extra you’d be putting into a bond and invest that saving to earn the higher interest? Van Wijk suggests you seek specialist financial advice if you’re thinking along these lines. “Remember, this may seem like a good idea on paper, but it will only work if you are prepared to rent a home at a rate that leaves you with money to invest in high-interest vehicles, and you will need the discipline to put that money aside every month. Few people have such discipline,” cautions Van Wijk.
Du Bois notes that the interest rate always fluctuates. “One may argue that the best time to purchase is when the interest rate is at its peak, when the property market is under pressure and you can take advantage of the bargains available. After your purchase, interest rates should fall and the market should recover, giving you lower interest rates on your bond and a healthy profit when you sell. If you buy when rates are low, consider your budget carefully and ensure it allows for an interest rate increase. If your budget is tight, it might be best to ask the bank to fix your bond amount.”
Seek financial advice
Both Just Property experts recommend getting financial advice, especially if you’re buying an investment property or second home. An accountant will help you consider the implications of capital gains tax, optimise the day-to-day income that would be received on income properties, how best to structure the purchase of property specific to your goals and circumstances, and possibly the entity in which property is to be held.
Are the scenarios different for a person in their early 40s and a young person in their late 20s? Van Wijk notes that the consequences of a bad decision are far greater as you get older, but at 40 you still have the chance to pay off a 20-year home loan before you retire. “You could even buy a home in a retirement village now and rent it out until you retire. Starting young has significant advantages.”
Du Bois agrees: “One only needs to look at what properties sold for 20 years ago to know that the sooner one purchases the better.”