“Should I rent or buy a property?” is perhaps one of the most frequently asked questions people ask themselves. There are several pros and cons depending on whether you want to buy or rent. Some important factors to consider when making a decision are, your life stage, income, personal status and commitment to a specific place.
Is it better to buy?
First thing you should focus on is your personal needs. If you are looking for a ‘forever home’ then buying makes sense. But if you are not sure about your long-term plans – even without looking at the numbers – renting makes more sense as it provides you with a lot of flexibility, especially with the current macro environment and uncertainty.
Renting Vs Buying
When it comes to buying versus renting, there is a lot more to consider than simply comparing your rental and mortgage payments. You need to factor in several hidden costs, such as maintenance, service, and interest charges among other ongoing variable costs.
Consider the opportunity cost of parking your funds into the property that will not provide any cash returns, only the potential of capital returns if the property appreciates, and possibly savings in rent if you have done your numbers right.
A simple way to analyze this option is to calculate the return percentage of the amount you are saving in both buying and renting. Take the annual rent of a similar property and compare that to the total annual cost of your mortgage and service costs. Presumably, there will be some savings for purchasing rather than buying. Now take that savings amount and divide it by the amount of money you will be putting as down payment. This will show you the return on your money. This is just a simple, back of an envelope exercise. If that return percentage is attractive then, yes, buying is a game changer for you financially. But if that return is not very high, and if you have other options to earn better return on that money. then you are better off investing your money and using the returns to subsidize your rent.
By renting and using funds saved that you would have used for a down payment or buying a property, –your wealth can be invested in income generating real estate or other asset classes. This gives you better overall return as that money earned from that investment can be reinvested, giving you compounding ability. There’s a reason Einstein called compounding the eighth wonder of the world.
You can alternatively use the earnings from the investment to subsidize your rent, allowing you to save more that can also be reinvested.
But you might feel like you are still wasting money paying rent and not getting the benefit of holding a real asset like real estate. You can still achieve that by investing in an income generating property. The rental income from this investment can be used to reduce your rent or give you more financial flexibility. Buying a rental income generating property is very different than buying your forever home. They are built differently and priced differently. The investment property will generally be easier to sell than an end user property. Let’s consider the example of a studio apartment in Dubai. Assume you are living in it, and you bought it last year for AED500,000. At the time of purchase the rent for a similar property was AED 50,000. Assuming you financed it, you would have made a down payment of approximately AED150,000 (30%), with all the transaction costs. Assuming your interest rate at the time was 3.75%, your monthly mortgage payment would have been approximately AED1,800 a month. But now you are also exposed to interest rate risk and not only real estate risk. A 0.75% increase in interest rate will increase your monthly payment to AED1,945, an 8% increase.
Yes, your mortgage payment is still below the rent amount, but once you factor in service charges and maintenance costs the gap narrows. Furthermore, this property of AED500,000 will end up costing you approximately AED687k with interest after the loan is paid off. It’s fair to assume the value of the property will be higher than that, but you would have paid almost AED188k to the bank in interest and increased your risk of carrying that investment. What if you lost your job in the process, or the interest rate increased substantially? You would be forced to sell at loses during bad economic environment and still owe the bank money. Also, for 25 years, your down payment of AED150,000 did not earn you a return – rather got you a liability which you had to fund for 25 years. Yes, you saved some money on rent, but when you factor in all the other costs, the savings doesn’t represent good returns on your investment.
Renting your property keeps you flexible. You are not burdened with a large debt obligation; you can easily move homes and even cities if needed and you can take advantage of rent decreases. Let’s use the current market in Dubai as an example. If you had bought a studio apartment, you would still be paying the same mortgage payment if not more if the interest rate had increased. Whereas if you were renting, you would negotiate a lower rent or move to a property with lower rent providing you more savings. You could argue: what if the rents increase? That is true, but that is why it makes sense to hedge yourself by buying an investment property because if the rents are increasing it’s more likely the investment property rents will increase as well, providing you with extra income
- As you can see, there are many factors to consider when making the decision to buy, or rent. Savings between buying vs renting
- The implied return of the savings on your down payment
- The flexibility of renting over buying
- The length of your
- intended purchase.
- How easy will it be to sell the property if you must move
- How easy will it be to sustain mortgage payments if you lose your job or your personal situation change?
If you like to learn more or help us evaluate your options, please write to us at [email protected].
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