The debate regarding the purchase or rental of a home continues – looking at it from a legal perspective, there are quite a few reasons why renting may be considered.
Costs of purchase
This includes transfer duty, conveyancing costs, estate agent’s commission (even though the Seller may be liable for the commission. The effect of the commission is to increase the price of the property as it is added to the nett purchase price) and bond registration costs.
This includes rates & taxes, insurance premiums and maintenance and repair costs. These costs are often overlooked by the buyers in calculating whether they can afford the house. Maintenance needs to be done regularly. In Housing Estates the Homeowners’ Association may enforce this strictly.
Property value decrease
The risk that property values may not always rise. If the area (or your neighbour) gets known for activities that are not desirable (i.e. drug trafficking), the property value from a homeowners’ perspective may be affected negatively.
Capital Gains Tax
Although there is a primary rebate applicable to a primary residence in respect of Capital Gains Tax (“CGT”), the rate at which CGT is payable has increased significantly over time and you may be surprised as to the amount of CGT that may be payable when you sell your house.
Costs of selling
When you sell your house, you have to take into account commission payable to the Estate Agent, the costs of providing for Certificates of Compliance in respect of electricity, plumbing, electrical gates, gas appliances, beetles, etc.
Political and economic risks
The owner of a property needs to consider the possibility of riot and unrest causing damage to his property and expropriation (with or without compensation). One may be able to take out insurance for these risks, but the insurance will not necessarily cover you fully in all respects. There are also economic risks pertaining to interest rate increases and the knock-down effect of a recession.
People seem to change jobs much more frequently these days and consequently a smaller percentage of employees stay employed by the same employer for a long period. Renting may then be much more flexible, as you are able to terminate a lease agreement with a maximum of 2 months’ notice (although this may incur penalties), whereas it may be a bad time to sell your house and buy another house near the new job.
Protection of tenants
Tenants, nowadays, enjoy better legislative protection in terms of the Rental Housing Act and the Consumer Protection Act and consequently the costs of obtaining an eviction order and the time involved can be quite daunting.
Overspending / Overcapitalization
It is only natural that people spend money on improving their homes, but in many cases this spending is not really necessary and may not add to the value of the house to the same degree in the eyes of a prospective purchaser, with the result that the owner may not fully recover the costs in respect of the improvements.
It is not abnormal for a family to start with a small house or apartment and, as the family grows, to acquire a larger property. Children may leave the family home and you may be required to “down-scale” which means selling your house again and purchasing a (smaller) house or apartment, with all the costs involved therewith.
The contra argument as to why you should rather buy your property is based, amongst other reasons, on the effects of inflation i.e. not having the benefit of appreciating at in value as a result of inflation. Whether that argument is strong enough to offset the benefits offered by renting is a decision one needs to make.
Most South Africans appear to really desire to own their own home, but having regard to the above considerations, it may not necessarily be in their best interest to go that route.
Before deciding, you should also consult your attorney, not only for checking the legal documents presented to you for signature, but also to advise you of the legal consequences that the proposed transaction will have on you and your family, considering your particular circumstances.
Article by Otto Low (Faure & Faure Inc. Consultant) with technical assistance by Zane Meyer (Faure & Faure Inc. Director).
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