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Buying Vs Renting: The Numbers

Updated: Sep 9

"I don't want to be throwing away all that money on rent."


Land ownership has been the most common way of building wealth throughout history, though this opportunity was largely reserved for the richest and most powerful elite until more recent times. The fact remains that in the past 100 years, most regular people who have built wealth, have done so through the ownership of property. For most people, the first piece of property they buy is their home (or apartment).


Housing is the largest expense that most people have-either in the form of rent or mortgage payments. When a third or more of your income goes to your housing, it's worth taking a close look at the numbers.


So how good of an investment is buying instead of renting the place where you live?


I have a friend who is expecting a 700,000.00 AED (about $200,000 USD) lump sum in the coming months. She is considering buying a 2.5 million dirham apartment using the lump sum as a down payment. She would then use her housing allowance to pay the mortgage for the next 8 years, with plans to sell or rent out the apartment when she leaves the country.


Certainly buying the apartment is a better idea than just parking that 700,000 AED in a savings account. But how does it compare to investing the 700,000 AED in low cost index funds? Let's run the numbers.


If she buys:


She would need a loan for 1,800,000 AED. Currently mortgage rates in the UAE are around 5%, and most people here go for a 25 year loan. With these numbers mortgage payments come out to 10,522.62 AED a month.


After 8 years she will have invested her original 700,000 lump sum plus an additional 1,010,171.59 in monthly mortgage payments towards the 2,500,000 price of the property.


However, she will still owe 1,444,115.08 on the mortgage. How is this possible? In addition to paying down the original loan amount, she is also paying 5% per year on the outstanding amount of that loan.


By the end of the 25 year mortgage period, if she makes her payment each month, she will have paid 1,356,786.22 in interest in addition to the original 1,800,000 loan. That's a total cost of 3,156,786.22 for a 1,800,000 loan. See the complete amortization table here.


When she relocates after 8 years, she would need to either sell the property to pay off the mortgage or become a landlord.


If she's able to sell her property for the same price she bought it, she will have to pay off the 1,448,601.86 mortgage. She will then have 1,051,398.14 in cash, meaning she made 355,884.92 in profit from the sale. But once you subtract the yearly service charges of 21,589 AED for the apartment community, and the monthly mortgage payments of 10,522.62, she will actually have lost 826,998.67, essentially throwing away that money on "rent" to live in the apartment over the 8 years. That's without counting homeowner's insurance, maintenance costs, and the transaction fees for buying and selling property.


Of course, the property could rise in value (remember the housing boom in the early 2000s?), but it could also fall. I have friends who bought on Reem Island in 2015 whose apartment is now valued below their purchase price. The trouble with putting so much money into one asset is that it's inherently not possible to manage the market risk with diversification. It's putting all your financial eggs into one basket.


If she rents:


Assuming her rent payments (currently at 12,917/mo for the same 3 bed apartment) are roughly equal to her potential mortgage payments and her housing allowance covers this she gets 0 at the end of the 8 years. She essentially threw away her rent payments in exchange for a place to live.


However, her 700,000 lump sum investment (in low cost index funds of course) will have grown to 1,115,693.65 for a profit of 415,693.65. (Assuming a conservative 6% return)


When she relocates, she can either keep the lump sum invested and let it continue to grow, or she can cash it out to buy a property in her home country. The value of her investment is liquid and can be cash in hand in a matter of days. She could use this to buy another property in her home country, or keep it invested for her future.

After 8 years

Rent and Invest in Low Cost Index Funds

Buy and able to sell at equal value

Buy and unable to sell

​Buy cash and sell at 37% gain (4% annual return)

Lump Sum

700,000.00

700,000.00

700,000.00

700,000.00

Total Rent*

1,239,936.00

1,182,883.52

1,182,883.52

1,182,883.52

Liquid Assets**

1,115,693.65

1,055,884.92

0

1,977,307.55

Debt

0

0

1,444,115.08

0

Gain/Loss

-824,242.35

-826,998.67

-1,882,883.52

94,424.03

*For buying, "rent" includes the mortgage payment and the annual community fees

**For buying:, Liquid assets is the cash leftover after paying off the mortgage after the sale of the property


It's actually cheaper to rent than it is to buy over the course of 8 years when property values stay constant. The only way you come out ahead with buying on a short timeline like this is if property values grow significantly. Unfortunately we can't predict what the housing market will do overall, and predicting how an individual property will fare is even more impossible. One area can lose value while another gains. If you are living in a newer and more volatile housing market like the UAE, the risk of a property losing value is greater than if you're buying in a more mature market.


What if you stay in your property for the full term of the mortgage? Then you will have paid 3,156,786.22 for your 2,500,000.00 apartment. Add in the annual service fees over 25 years and you'll have paid 3,696,511.00 (assuming the fees stay the same, ha ha). Hopefully the value of your property increases by more than 5% per year to make up for all of the interest you've been paying-it's just not guaranteed. In the United States, over the past 45 years, the average price of houses sold has only increased by about 4% per year. Of course that's the average of the entire US housing market and we are looking at a single property in a different country, but it gives a general idea of how property values have grown over time.


Over that same 25 years you would have paid 178,289 more in rent (3,874,800 total assuming rent stays the same, lol). But what about your 700,000 investment? It would have grown to 3,004,309.50 (at a conservative 6% per year return).

After 25 Years

Rent + Invest

Mortgage

Buy Cash

Lump sum

700,000.00

700,000.00

2,500,000.00

Rent*

3,875,100.00

3,696,511.00

539,000.00

Liquid assets

3,004,309.50

Only if you sell

Only if you sell

Gain/Loss

-870,490.50

-3,696,511.00

-3,039,000.00

*For buying, "rent" includes the mortgage payment and the annual community fees


What if you could buy the property cash and avoid the mortgage altogether?


You will still owe the service fees, maintenance, insurance and transaction costs.

Your money will grow more reliably in the stock market (you are buying whole-index tracking low-cost ETFs, right?) because your money is spread across thousands of assets instead of all being in one single property (Diversification).


The stock market historically gains 10% per year on average. When making assumptions we often adjust this down to 6-8% to take into account inflation.


If you invested your 2,500,000 in a low cost index fund like VWRA, you could reasonably expect to make between 6-8% in returns annually. Your investment would be highly diversified, hedging against risk.

After 8 Years

Rent + Invest 2.5M

Buy Cash and able to sell at equal value

Buy Cash and unable to sell

​Buy Cash and sell at 37% gain (4% annual return)

Lump sum

2,500,000.00

2,500,000.00

2,500,000.00

2,500,000.00

Rent*

1,239,936.00

172,712.00

172,712.00

172,712.00

Liquid Assets

3,984,620.19

2,500,000.00

0

3,421,422.63

Gain/Loss

​244,684.19

-172,712.00

-2,672,712.00

748,710.63

*For buying, "rent" is the annual community fees


After 8 years you would have 3,984,620.19, after 25 years you would have 10,729,676.80. All of this would be liquid, easy to sell on the exchange within a few days whenever you need to. You wouldn't be tied to a place, you would have the ability to move as it suits your life (more space when you have kids, less space when they move out, being closer to a new job, or being near to family)

After 25 years

​Rent + Invest 2.5M

​Buy Cash and able to sell at equal value

​Buy Cash and unable to sell

Buy Cash and sell at 167% gain (4% annual return)

Lump Sum

2,500,000.00

2,500,000.00

2,500,000.00

2,500,000.00

​Rent

3,874,800.00

539,725.00

539,725.00

539,725.00

Liquid Assets

10,729,676.80

2,500,000.00

0

6,664,590.83

Gain/Loss

4,354,876.80

-539,725.00

-3,039,725.00

3,624,865.83

It is possible that buying your house or apartment could make you money, but it's not a diversified investment, therefore there is greater risk. You have to put a very large amount of your net worth all into a single asset. Your future is tied to the market forces affecting that single property. If there is a natural disaster, a fire, or even structural damage, the value of your property can diminish. Not to mention newer housing being built that outshines your property.


The moral of the story is that it costs money to live in a place. You either pay the money in rent, in interest and fees on a mortgage, or in the opportunity cost of not investing your capital in other ways.


However, buying property isn't just about numbers. See next week's post for a qualitative analysis of buying vs renting.


an image of me sitting outside in the grad beneath our rented apartment. Buying vs renting, renting has always come out on top for us.
My husband nearly bought an apartment in JLT a month before the bubble burst in 2008, thankfully he got cold feet. This is me in 2013 right before we took a year off to travel. That trip wouldn't have been possible had he bought the apartment just a few years earlier.

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