Khaleej Times, 23 January, 2019
There are a number of pros and cons regarding buying or renting. Important factors weighing on the decision include your time of life, income, personal status and commitment to a specific place. But we firmly believe that in the current market, you should rent.
Simply put, buying requires a lot of money and doesn’t earn you any income, in fact you are paying to live in your own house. Also, the cost of borrowing has been increasing, meaning your mortgage payment will increase, while rental prices are still coming down – so you lose that opportunity.
The best issue to focus on is your personal needs. If you are looking for a ‘forever home’, then buying might just make 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 rising interest rates trend.
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 a number of ‘hidden costs’, such as maintenance, service and insurance 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.
The equation and opportunity cost changes drastically if you finance your purchase. Then you have not invested in an asset, rather shouldered a long-term liability that will obligate you to pay – rather than earn returns.
By renting – and using funds saved that you would use for 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 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.
Use a property investment crowdfunding platform and invest your hard-earned down payment in multiple properties that will help you diversify your investment, rather than investing all your money in one asset and increasing your concentration risk. You can use the money generated from it to re-invest in more properties and build a real estate portfolio or use it to pay for rent or other lifestyle expenses.
You can alternatively use the earnings from the investment to subsidise your rent, allowing you to save more, then that can also be reinvested.
Renting provides greater flexibility – you can easily move if required, downsize or upsize, depending on your needs. You are not anchored down by a huge debt burden. Freedom and peace of mind are priceless. No financial return will provide these.
As an example of the cost of buying, let’s take a studio apartment. Assume you are living in it, and you bought it last year for Dh500,000. At the time of purchase, the rent for a similar property was Dh50,000. Assuming you financed it, you would have made a down payment of approximately Dh150,000 (30 per cent), with all the transaction costs. Rents have reduced, and the interest rate has increased. Assuming your interest rate at purchase time was 3.75 per cent, your monthly mortgage payment would have been approximately Dh1,800 a month. With an interest rate increase of almost 0.75 per cent, it would have increased to Dh1,945. That’s an 8 per cent payment increase, and rates are expected to increase.
Yes, your mortgage payment is still below the rent amount, but once you factor in the service charges, maintenance costs, other costs and the cost of the lack of flexibility, the gap narrows. Furthermore, this property of Dh500,000 will end up costing you approximately Dh687,000 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 Dh188,000 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 expose yourself to many other risks.
Also, for 25 years, your down payment of Dh150,000 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 all the other costs in, the savings don’t represent good returns on your investment.
The writer is co-founder of Smart Crowd. Views expressed are his own and do not reflect the newspaper’s policy.