Owning vs renting your primary home: Is investing in a secondary property the smarter move?
In the ever-evolving South African property market, the debate between owning your primary residence versus renting it and investing in a secondary property is a topic that frequently arises among both seasoned and first-time buyers, and for some, renting their primary home while owning a rental property could be a strategic financial decision, says Antonie Goosen, principal and founder of Meridian Realty.
The Traditional Approach: Owning Your Primary Residence
For many, the idea of homeownership is deeply ingrained as a cornerstone of financial security and personal success. "Owning your primary residence has always been seen as a fundamental step towards building wealth and establishing roots," says Goosen. There's a sense of permanence and stability that comes with owning your own home. It allows homeowners to build equity over time, benefit from property appreciation, and have full control over the property, free from the constraints and uncertainties that come with renting.
"Owning your home means you're not at the mercy of landlords or rental increases. Over the long term, homeowners can also potentially reduce their living expenses, as once a mortgage is paid off, housing costs drop significantly compared to rent, which can continue to rise indefinitely, he says.
However, Goosen also acknowledges that homeownership comes with its own set of responsibilities and costs. Maintenance, insurance, rates, and taxes are ongoing expenses that homeowners need to budget for," he explains. These costs can be substantial, especially in a volatile economy or in cases where the property requires significant upkeep.
READ: Mistakes to avoid when buying or selling a home
The Alternative Strategy: Renting Your Primary Home and Owning a Secondary Property
In contrast to the traditional model, some savvy investors are opting to rent their primary residence while purchasing a secondary property as an investment. "This strategy can offer greater flexibility and financial advantages, depending on the individual's goals and market conditions," says Goosen.
One of the primary benefits of this approach is the potential for generating a steady income stream. "By owning a rental property, you can earn rental income, which can help cover the mortgage payments or even provide additional cash flow," Goosen notes. This can be particularly appealing in areas with strong rental demand and where property values are rising. Renting a primary home also offers the advantage of flexibility. "As a tenant, you have the freedom to move more easily, whether it's for work, lifestyle changes, or to take advantage of new opportunities," Goosen explains.
This flexibility can be a significant benefit in an uncertain economic climate, where the ability to relocate or adjust living arrangements can offer peace of mind. Moreover, the financial commitment of renting may be lower in the short term compared to homeownership, freeing up capital that can be invested elsewhere. "By renting your primary residence, you may be able to invest in other assets or even purchase multiple rental properties, diversifying your portfolio and potentially increasing your returns".
Weighing the Risks and Rewards
While the strategy of renting your primary home and owning an investment property has its merits, it's not without risks. "Property investment requires careful consideration of factors such as location, tenant management, and market conditions," Goosen cautions. An ill-advised purchase or an extended vacancy can quickly turn a profitable venture into a financial burden. Additionally, renting a primary home means you're subject to the decisions of a landlord, including the possibility of rent increases or the need to move if the property is sold. "Renters must also consider the emotional aspect of not owning their home, which for some, can feel less secure," Goosen adds.
One of the key financial considerations in this debate is tax. "The tax advantages of owning an investment property over a primary residence can tip the scales in favour of this strategy," says Goosen. For rental properties, owners can deduct expenses such as mortgage interest, maintenance costs, and property management fees from the rental income they generate. This can significantly reduce the tax burden and increase cash flow. "By offsetting rental income with these deductions, investors may find that their net tax obligation is far lower than expected," he says.
In contrast, owning a primary residence does not come with these tax breaks. "There are generally no deductions for interest payments, insurance, or maintenance costs on a primary home," explains Goosen, which makes homeownership potentially more costly from a tax perspective. However, if you sell your primary home, you may qualify for the capital gains tax (CGT) exclusion of up to R2 million, which can be a major financial benefit in the long run.
On the flip side, Goosen notes that if you sell a secondary property, you will be liable for full CGT on the gains, which can reduce your profit. "Investors must carefully weigh the immediate tax benefits of rental property ownership against the potential CGT implications when selling," he advises.
READ: First-time homebuyers: Here is what to expect after signing the offer to purchase
Additional tips:
In an article published October 2023, Samuel Seeff, chairman of the Seeff Property Group, said it is vital to realise that an offer to purchase a property is a legally binding contract and that you cannot get out of it without incurring onerous financial penalties. You should therefore be ready to purchase the property before you put in your offer.
A property is a long-term purchase, and you need to ensure you make the right decision before putting in the offer. You cannot put more than one offer in at a time and once that offer is in, it is binding unless it lapses due to your inability to fulfil any potential suspensive conditions.
Click here to read the tips from Seeff.
Finding the Right Balance
Ultimately, the decision between owning your primary residence and renting while owning a secondary property depends on individual circumstances, goals, and risk tolerance. "There's no one-size-fits-all answer," Goosen states. "For some, the security and stability of owning their home outweigh the potential financial benefits of renting. For others, the flexibility and income potential of an investment property make it the smarter choice." Goosen advises potential investors to carefully evaluate their financial situation, market conditions, and long-term goals before making a decision. "It's essential to consider both the immediate and future implications of either strategy," he says. "With careful planning and a clear understanding of the risks and rewards, you can make an informed decision that aligns with your financial aspirations."
As South Africa's property market continues to evolve, so too do the strategies for building wealth through real estate. Whether you choose to own your primary residence or explore the benefits of renting it while investing in a secondary property, the key lies in understanding your financial goals and the dynamics of the market. As Goosen suggests, taking a strategic approach that considers both the short-term and long-term impacts can help you make the best decision for your financial future.
18 Sep 2024
Author Property24