Most think the “Rent or Buy” question has an obvious answer: “If you can afford it, buy, since renting is throwing money away”. Wrong.
I will tell you simply in this post why buying can mean throwing money away and renting can be the most profitable decision from a financial point of view. The 4 main reasons are the following:
1. Buying is Renting
Yes indeed, to buy, apart if you have the entire sum handy, you rent money from a bank to buy a house. And right now in Spain, mortgages are too expensive compared to rates in other countries or the official Euribor rates. The banks are taking too much of a margin after charging not enough before the crisis.
2. Rent = mortgage payments + 30%
Yes, you read well.
Do not think that if you spend 1000 € in rent a month, then you should aim for a 1000 € mortgage. It is plain wrong.
In Madrid, when you buy a property, you have to add 10-15% on top of the price in various costs and taxes just to complete the purchase and the move. For more details, read my article on the costs when buying a property in Madrid
Then, after the purchase, as in any other country, add another 10-15 % for all on-going costs: maintenance, insurance, improvements, taxes (local, collectivity, capital gain).
In the end, I recommend to add 30 % to the final price of the property you are considering to compared it to rent to account for all these costs to compare it to rent. Because yes, all these costs are included in rent.
3. To buy, you need to hold
Another key topic is the evolution of the property price – you can lose money on the sale of a property, whereas you can just walk out a rental.
In Madrid, sale prices are going to go down at least during 2012 and 2013. Rental prices are stable or increasing. This does not mean you have to wait 2 years to buy, but it does mean that if you buy, you will have to hold the property at least 5 to 7 years to make sure you get your money back when you sell your property.
4. Rental prices are low in Madrid compared to prices for now
Rental prices in Madrid in neighbourhoods close to the centre are significantly lower than the equivalent price + interest you would have to pay to buy a similar flat.
In financial terms, this is called “Rental yields” – in %, how much renting your property would give you back. This is the best indicator to compare purchasing and renting prices for the same properties.
Well, in Madrid, gross yields are around 4%, on average when many capital cities such as London or Paris go down to 2-3%.
Conclusion- Take a personal decision. Do not follow the trend.
In the end, the rent or buy question has nothing to do with money, but with culture.
Most of the world (or what I’ve seen directly having lived in China, Canada, France, Spain, UK) think owning your house is the best way to go, and many look down on renters.
See if renting or buying makes more financial sense, and see if the answer to this question enables you to live your life the way you want.
I am not saying neither than you should always rent. What I wanted was to break the myth of the “Renting is throwing money away”.
Do not hesitate to comment and/or send me an e-mail if you have any kind of question or if you are hesitating on the “rent or buy” decision !
Pierre – Moving2Madrid.com
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