Rent or Buy? dead money?

Many tenants complain of their rental money being wasted as dead money, but this is simply not true & one of the most basic errors in calculating lost investment.

de Damian Galvin la categoria Editorial

Publicat la 06.09.2010 | 507 vizualizări | 0 comentarii

Tenants frequently complain that renting is dead money & buying is much better. This is very rarely true.

Normally, rent value is calculated, although not too many people seem to know this, as a % of the property price, otherwise knonw as rental yield. Currently in Romania, many residential properties are rented at 3-7% annually of the value of the house.

Example, a residential apartment or house worth 100,000 euros would typically rent out for 300 to 550e per month.

Therefore, 12x rent = 3600 to 6600 euros, = 3.6 to 6.6% of the house value.

However, they have often not had to:

• spend 5,000 to 10,000e on lights, kitchen, carpets, furniture, decorations, garden
• spend 2,000-4,000 on buying the place
• spend 2,000-4,000 on selling the place
• spend 200 to 400 euros per year on maintenance
• Borrow money at 8-10% from the bank plus high set up fees, or
• forego obtaining 8-10% interest on any money investing in the house by not putting in into a bank account.

A buyer conversely, either has to borrow bank finance or use his own money, Either way, it will cost him 8-10% in this climate.  Over a 10 year ownership experience, an owner will need to obtain all of these costs back in growth, after any taxes due are paid, before he is as well-off as the tenant.

Only after that value of growth is achieved can the owner say he is better off than the tenant. Indeed, if the tenant saves & banks the money saved over buying, he is even further ahead.

Until the rent cost is equal to or higher than the cost of borrowing, plus an amount equivalent to the buying, selling & furnishing losses, he is infinitely better off. If you move homes every 3 to 5 years anyway, in a normal growth market, renting is much cheaper than buying. What tenants need to concentrate on, is finding a stable landlord that will look after them, so they can enjoy a secure rental period without uncertainty.

Moreover, if the market falls, so will the rent value, yet the mortgage remains at its original high level, further advantaging the tenant.

Example, I have an apartment that cost & is mortgaged at 160,000e. The mortgage is 1200 euros per month but the rent is 400e! I loose 10,000e per year. The current value is 120,000e. it will take 5-8 years to reach 160,000 & in the mean time, i have lost 50,000e in mortgage payments.

The single time when a residential tenant is worse off renting than buying is in a strongly rising market or when the rent is higher than normal levels for a given property. Such cases in my experience are rare.

Problem being, most tenants do not understand this calculation & have blind fear based on no data. They believe the old saying, 'renting is dead money', whch there parents told them, when apartments cost 10,000e!

Renting is often, cheaper, much much cheaper than buying, short term booms aside.