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It’s been a while since I’ve done a rent-vs-buy reader case, so I thought I’d pick one out of the ol’ email folder and give it a whirl. Or at least, I think it’s been a while. It’s hard to tell the passage of time anymore. Is it March? Is it August? Honestly, if I didn’t have these article deadlines to hit every week, I’d probably lose track of what day it was too. So…yay?
Anyway, onto the reader case!
Hello Firecracker and Wanderer,
I hope you, your family and friends are all doing ok during this pandemic.
I would be very grateful if you could provide me with your thoughts on my analysis of buying an apartment or not.
My situation is as follows:
- 49 yrs old, single, no persons at charge, no debt
- 213K euro in cash
- 419K euro in EFT Vanguard S&P 500
- 20K euro in individual stock
- +/- 115K euro in a sort of 401k (the terms&conditions are not exactly identical as a US 401k, but the big picture is the same. I can’t access those funds before age 65, and cannot decide on its investments either. Ergo, let’s assume it will only compound with inflation).
- No capital gain tax nor dividend tax where I live, so I’ll only need to pay taxes (I figure around 10%) on the 401k in about 16 years.
- I’ll lose my (very highly paid job) in about 3 weeks, and will very likely revert to unemployment allocations for the next 24 months. During those 24 months, I expect to be able to set aside 2K euro per month of those allocations, i.e. 48K euro during those 24 months.
After those 24 months, I’d really like to go back to the north of Spain where I’ve lived many years, buy myself a small apartment, in cash, no mortgage (let’s say 150K euro, all in).
My question is the following: I cannot see any value-add in buying an apartment over renting it, but I was wondering if I’m overlooking something?
I work with the following variables:
- I use a compound interest of 3,5% on the opportunity cost, i.e. the Return On Investment on the 150K euro I save by not buying the apartment. You’ll agree with me that this is a very conservative assumption.
- I assume that a 150K euro apartment can be rented for 700 euro per month. This is a realistic assumption where I’ll be living.
- I also assume that the value of the apartment will not increase over time. That is based on real-estate prices of the last 20 years in the region I want to live. 2008 wreaked havoc on the house prices there, and the market is far from recovered. Furthermore, I’m not even taking into account that a 150K euro apartment today may be a lot cheaper in 6 months, 12 months, 24 months, so I may even buy it a lot cheaper.
- I also assume a realistic 1,000.00 euro property taxes per year in case of home-ownership, and 1% of the purchase value set aside per year for maintenance, and I kept those amounts fixed over time (we could argue that…)
In the long run I see a numeric advantage for renting, even assuming a very low compound interest of 3,5%.
Things may change if we assume rising house prices, but that would be easily offset by equally assuming a rise in the compound interest rate.
And I’m even leaving aside the other pitfalls of home ownership such as increased property taxes (current government in Spain is, let’s face it, having communist sympathies and tax increase is all they know), undesirable neighbors, unexpected costs not covered by the 1% I’m assuming each year, changes in my life choices which may make me want to move etc…
So my question is: Does my analysis make sense, or am I overlooking something big? I can’t discuss this with any of my friends, since all of them are up to their eyeballs in mortgage debt and they don’t want to admit that maybe, just maybe, renting might be a better deal, at least from a purely numeric point of view.
Thank you very much guys! I’m always looking forward to reading your latest updates!
Take care and best regards,
This one’s a little different than our normal case studies since BuyOrRentInSpain isn’t asking about retiring early as most readers do. Rather, they feel like they have their overall financial situation mostly under control and are asking us for the specific question about whether they should buy a €150,000 apartment in Spain, or rent the same one for €700 a month.
Now, normally, with a rent that low I’d say just rent and save the hassle. But on the other hand, a €150,000 apartment isn’t that crazy, so it’s feasible that owning might beat renting at that price point.
As always, we will let math be our guide.
Now, there are a few different ways to analyze this choice. Each has their own strengths and weaknesses, but we’ll go through each method and see what verdict they render. Then at the end, we’ll see what the majority says and that will be our answer. It’s math, but, like, democratic math! Or something.
Recall that in a previous reader case we talked about ROI as a measure of a property’s performance as an investment. This is typically done for investment properties to see if it’s a good investment but let’s try it for this property to see if it would be a good theoretical investment.
We start by taking what this apartment would typically rent for, in this case, €700 a month, or €8400 a year. Then we subtract any annual ownership costs like property taxes, maintenance, and mortgage. Our reader has provided €1000 a year for property taxes and 1% of the property value, or €1500 a year for maintenance. They have not mentioned any condo fee, land transfer taxes, or real estate commissions, and normally that would be cause for me to call it unrealistic, but hey, it’s Spain. I have no idea whether these same costs that are common in North America apply over there, so I will simply take this at face value.
Our reader also doesn’t need a mortgage, so we don’t have to account for that. Therefore, our ROI is (€8400 – €1000 – €1500) / €150,000 = €6,800 / €150,000 = 4.5%.
So as an investment property, blegh.
I can get 5% passively from a REIT, so if this were an investment property, I’d give it a pass, especially considering that the ownership costs seem somewhat on the optimistic side, the actual ROI would likely be lower.
As I’ve written in the past, I hate opportunity cost analysis. There are tons of ways to get confused trying to understand opportunity cost (like, if I didn’t buy a ferari, can I add $100K to my analysis?), but in the interest of being thorough, let’s use a few different methods and see what we get.
Opportunity cost is, in short, the cost of NOT doing something.
If your default strategy with your money was to, say, invest it in an ETF-based portfolio, then the opportunity cost of locking that money away in a house (or “dead equity”) is equal to what that money WOULD have earned had you done nothing and kept it invested.
Our reader assumes his investments would compound at 3.5%. That’s really conservative (a long-term balanced and diversified portfolio averages 6%), and I suspect such a low ROI would tip the scales in favor of home ownership, but let’s follow the numbers and see where it takes us.
So that means, the yearly cost of owning a home is the property taxes (€1000), maintenance (€1500) plus the money you WOULD have earned by keeping that cash you spent purchasing that home invested (€150,000 x 3.5% = €5,250), for a total of €1000 + €1500 + €5,250 = €7,750/year.
(Note, the reader has not included insurance or additional costs like land transfer tax, home inspection, etc. But since we do not know how much that would cost in Spain, we’ll have to leave it out. They should add it themselves and redo this calculation on their own time for accuracy)
Contrast that with the rent they would have paid: €700 x 12 = €8400/year.
Hmm…so at an 3.5% assumed growth rate on our reader’s investment portfolio, that would actually mean he SHOULD buy it, since his ownership costs are less than the rent he would be saving.
The key here is the investment rate of return. If he’s too conservative and actually only expecting a long-term growth rate of only 3.5% on his €150,000, then yeah he might as well buy the house since he’s not losing out on that much money. But if his portfolio earns just a little bit more, at 4%, then the math shifts in favour of renting, because his opportunity cost would become €150,000 x 4% = €6000, for a total annual ownership cost of €1000 + €1500 + €6000 = €8500, which causes renting to just edge out owning by €100.
But as I’ve mentioned, opportunity cost is a confusing way of looking at things. I prefer to game out the two scenarios head-to-head using my trusty spreadsheets and see which options beats which one. So let’s do that.
If we add up all his liquid assets and get them all invested in the same portfolio, we would have a starting total net worth of €767,000. Not bad at all.
So let’s throw this into Excel and build a projection of how his net worth will continue to grow if he rents.
|1||767,000.00 €||26,845.00 €||-8,400.00 €||785,445.00 €|
|2||785,445.00 €||27,490.58 €||-8,400.00 €||804,535.58 €|
|3||804,535.58 €||28,158.75 €||-8,400.00 €||824,294.32 €|
|4||824,294.32 €||28,850.30 €||-8,400.00 €||844,744.62 €|
|5||844,744.62 €||29,566.06 €||-8,400.00 €||865,910.68 €|
Now, let’s put this projection side-by-step with a projection of the scenario where he buys the apartment. His portfolio goes down immediately by €150,000, but his €8400 yearly rent is replaced by the much lower €2500 cost of property taxes and maintenance.
The left half of the table is the rental scenario, and the right half of the table is the buy scenario.
|Year||Balance||ROI||Rent||Total||<Rent Buy>||Balance||ROI||Ownership Cost||Total|
|1||767,000.00 €||26,845.00 €||-8,400.00 €||785,445.00 €||617,000.00 €||21,595.00 €||-2,500.00 €||636,095.00 €|
|2||785,445.00 €||27,490.58 €||-8,400.00 €||804,535.58 €||636,095.00 €||22,263.33 €||-2,500.00 €||655,858.33 €|
|3||804,535.58 €||28,158.75 €||-8,400.00 €||824,294.32 €||655,858.33 €||22,955.04 €||-2,500.00 €||676,313.37 €|
|4||824,294.32 €||28,850.30 €||-8,400.00 €||844,744.62 €||676,313.37 €||23,670.97 €||-2,500.00 €||697,484.33 €|
|5||844,744.62 €||29,566.06 €||-8,400.00 €||865,910.68 €||697,484.33 €||24,411.95 €||-2,500.00 €||719,396.29 €|
It’s not easy to see in the above table because of the number of columns, but if we strip out all the intermediate columns and only display the “Total” columns for the Rent and Buy scenarios side by side, and add in an extra column called “Rent vs Buy” which is simply the difference between the two numbers, we see something very interesting…
|Year||Rent||Buy||Rent Vs Buy|
|1||785,445.00 €||636,095.00 €||149,350.00 €|
|2||804,535.58 €||655,858.33 €||148,677.25 €|
|3||824,294.32 €||676,313.37 €||147,980.95 €|
|4||844,744.62 €||697,484.33 €||147,260.29 €|
|5||865,910.68 €||719,396.29 €||146,514.40 €|
Remember, “Rent Vs Buy” is how much further ahead Rent is against Buying. At first, Rent starts off way ahead, which makes sense since Buying requires removing €150,000 from the portfolio. But over time, we see this lead start to degrade. That means that if we project out this simulation long enough, the two numbers will crossover at some point, where Buy will begin taking the lead. Which does happen…
|Year||Rent||Buy||Rent Vs Buy|
|1||785,445.00 €||636,095.00 €||149,350.00 €|
|2||804,535.58 €||655,858.33 €||148,677.25 €|
|3||824,294.32 €||676,313.37 €||147,980.95 €|
|4||844,744.62 €||697,484.33 €||147,260.29 €|
|5||865,910.68 €||719,396.29 €||146,514.40 €|
|6||887,817.56 €||742,075.16 €||145,742.40 €|
|7||910,491.17 €||765,547.79 €||144,943.39 €|
|8||933,958.36 €||789,841.96 €||144,116.40 €|
|9||958,246.91 €||814,986.43 €||143,260.48 €|
|10||983,385.55 €||841,010.95 €||142,374.59 €|
|11||1,009,404.04 €||867,946.34 €||141,457.71 €|
|12||1,036,333.18 €||895,824.46 €||140,508.72 €|
|13||1,064,204.84 €||924,678.31 €||139,526.53 €|
|14||1,093,052.01 €||954,542.05 €||138,509.96 €|
|15||1,122,908.83 €||985,451.03 €||137,457.81 €|
|16||1,153,810.64 €||1,017,441.81 €||136,368.83 €|
|17||1,185,794.02 €||1,050,552.28 €||135,241.74 €|
|18||1,218,896.81 €||1,084,821.61 €||134,075.20 €|
|19||1,253,158.19 €||1,120,290.36 €||132,867.83 €|
|20||1,288,618.73 €||1,157,000.52 €||131,618.21 €|
|21||1,325,320.39 €||1,194,995.54 €||130,324.84 €|
|22||1,363,306.60 €||1,234,320.39 €||128,986.21 €|
|23||1,402,622.33 €||1,275,021.60 €||127,600.73 €|
|24||1,443,314.11 €||1,317,147.36 €||126,166.76 €|
|25||1,485,430.11 €||1,360,747.51 €||124,682.59 €|
|26||1,529,020.16 €||1,405,873.68 €||123,146.48 €|
|27||1,574,135.87 €||1,452,579.26 €||121,556.61 €|
|28||1,620,830.62 €||1,500,919.53 €||119,911.09 €|
|29||1,669,159.69 €||1,550,951.71 €||118,207.98 €|
|30||1,719,180.28 €||1,602,735.02 €||116,445.26 €|
|31||1,770,951.59 €||1,656,330.75 €||114,620.84 €|
|32||1,824,534.90 €||1,711,802.32 €||112,732.57 €|
|33||1,879,993.62 €||1,769,215.41 €||110,778.21 €|
|34||1,937,393.40 €||1,828,637.95 €||108,755.45 €|
|35||1,996,802.16 €||1,890,140.27 €||106,661.89 €|
|36||2,058,290.24 €||1,953,795.18 €||104,495.06 €|
|37||2,121,930.40 €||2,019,678.01 €||102,252.38 €|
|38||2,187,797.96 €||2,087,866.74 €||99,931.22 €|
|39||2,255,970.89 €||2,158,442.08 €||97,528.81 €|
|40||2,326,529.87 €||2,231,487.55 €||95,042.32 €|
|41||2,399,558.42 €||2,307,089.62 €||92,468.80 €|
|42||2,475,142.96 €||2,385,337.75 €||89,805.21 €|
|43||2,553,372.97 €||2,466,324.58 €||87,048.39 €|
|44||2,634,341.02 €||2,550,145.94 €||84,195.08 €|
|45||2,718,142.96 €||2,636,901.04 €||81,241.91 €|
|46||2,804,877.96 €||2,726,692.58 €||78,185.38 €|
|47||2,894,648.69 €||2,819,626.82 €||75,021.87 €|
|48||2,987,561.39 €||2,915,813.76 €||71,747.63 €|
|49||3,083,726.04 €||3,015,367.24 €||68,358.80 €|
|50||3,183,256.45 €||3,118,405.09 €||64,851.36 €|
|51||3,286,270.43 €||3,225,049.27 €||61,221.16 €|
|52||3,392,889.89 €||3,335,426.00 €||57,463.90 €|
|53||3,503,241.04 €||3,449,665.91 €||53,575.13 €|
|54||3,617,454.48 €||3,567,904.21 €||49,550.26 €|
|55||3,735,665.38 €||3,690,280.86 €||45,384.52 €|
|56||3,858,013.67 €||3,816,940.69 €||41,072.98 €|
|57||3,984,644.15 €||3,948,033.62 €||36,610.53 €|
|58||4,115,706.70 €||4,083,714.79 €||31,991.90 €|
|59||4,251,356.43 €||4,224,144.81 €||27,211.62 €|
|60||4,391,753.90 €||4,369,489.88 €||22,264.03 €|
|61||4,537,065.29 €||4,519,922.02 €||17,143.27 €|
|62||4,687,462.58 €||4,675,619.30 €||11,843.28 €|
|63||4,843,123.77 €||4,836,765.97 €||6,357.80 €|
|64||5,004,233.10 €||5,003,552.78 €||680.32 €|
|65||5,170,981.26 €||5,176,177.13 €||-5,195.87 €|
|66||5,343,565.60 €||5,354,843.33 €||-11,277.73 €|
…65 years later. And when we dig into why this is, it’s because I used 3.5% as the portfolio’s ROI, same as the reader initially did. At 3.5%, the lost performance of the €150,000 is not enough to make up for the rent our reader no longer has to pay under the Buy scenario, and what happens is that the Rent scenario gradually loses ground to the Buy scenario until finally the Buy scenario overtakes it.
BUT, if we tweak the ROI on the portfolio to 4%, we get this…
|Year||Rent||Buy||Rent Vs Buy|
|1||789,280.00 €||639,180.00 €||150,100.00 €|
|2||812,451.20 €||662,247.20 €||150,204.00 €|
|3||836,549.25 €||686,237.09 €||150,312.16 €|
|4||861,611.22 €||711,186.57 €||150,424.65 €|
|5||887,675.67 €||737,134.03 €||150,541.63 €|
The rental scenario starts off ahead just like before, but because the portfolio is performing at 4% rather than 3.5%, it not only maintains its lead against Buy, but gradually builds on it, until over time Rent becomes unstoppable.
The Votes Are in
So there you have it. The ROI analysis votes to keep renting, but the Opportunity Cost and Two-Scenario Analysis method give a slightly more nuanced answer. If the ROI of your portfolio is below 4%, then it makes sense to buy because the money you used to buy the apartment wasn’t performing that great anyway. But at 4% or above, then rent is the clear winner.
Alright that’s it! What do you think BuyOrRentInSpain should do? Let’s hear it in the comments below!
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32 thoughts on “Reader Case: Rent or Buy in Spain”
I think the math is right based on the assumptions you have to work with. I live in a large Canadian city that moves through boom and bust/flat cycles in real estate that has worked in my favor over the past 25ish years (and my house is only a part of my net worth) I am now considering if owning will continue to be a good use of my funds because real estate will potentially decline based on the one horse economy that drives prices in my city. I think the biggest consideration will be if I can rent something that meets my needs within an appropriate costing. I have considered 4% of the value of my house to be about the break even point when I consider lost investment income, taxes and maintenance (and condo fees if applicable)…so if my house is worth say $700k cad, I would need to be able to find something that costs around $28000/year or 2300 cad/ month. Given that the condo market is diving here and many units are being turned into rental i think that there is merit to selling and renting in my market…all this to say…what is true today may not be true tomorrow and that there are local economic factors and personal factors that play into the decision…but I totally get that this is a scenario and that most people are driven by the extraneous (economic and emotional) factors rather than the pure numbers as we know them today.
Another Calgarian I presume??
Probably an Albertan
For the Buy total, I think you need to add 150000 back in each year. Since BuyOrRent assumes the value of the apartment will not appreciate, the 150000 stays the same from year to year. If you do this, Buy will be slightly better, even in year one. This agrees with your analysis that Buy is slightly better including Opportunity Cost (7750 vs 8400).
Totally agreed !
Agree, the home value needs to appear somewhere in the calcs.
Hello fellow reader! I would lean toward keeping the lump sum invested and renting. Your letter asked about the math, but with regard to softer factors, my vote is to preserve your flexibility. Good luck!
I know the reader may be single now but may not be in the future…
What catches many people from the UK out who retire in Spain is that there is no spousal tax free transfer on death. So if you die, inheritance tax from your Spanish estate becomes payable immediately, unlike say in the UK.
If the reader rents, there can be a much less Spanish estate.
I’m curious where you find a REIT fund for 5% dividend? The best I can find 3.47%. Renting definitely gives you flexibility, but buying can give you piece of mind, which is tough to quantify.
I would like to know the name of the REIT too. If it is paying 5% consistently, I’m in!!!!
WPC I’ve held this REIT for over 20 years. Check the chart
I have often heard: buying a property can give a peace of mind. The reasoning is because we will always have a place to live.
Personally, I disagree. Having a property is not a guarantee that we can always live there. If we don’t have cash to pay the property tax, can no longer afford the living cost in that area, we will be driven out of the property sooner or later.
What gives us a peace of mind is cash. We can always find a place to live if we have enough cash at any time, and we can adjust our lifestyle anytime.
As a side note, buying a house and finding that we are incompatible with the neighbor (not blaming either side), will immediately take away our peace of mind….;-)
ZRE is the one I have. 5.18% at the moment.
In trying to make my own rent vs own calculator, I noticed that this example shows the rent remaining the same amount year over year. I know our rent increases by at least 3% if not more per year in the States. In trying to project a side by side 10 year investment I would start paying $2K in rent and end up paying $2,687.82 per month at the end with a best case scenario of a 3% increase per year. (Living in LA, these are the real #s I’m looking at)
Anyone else figure out how this will effect the buy vs own charts?
That was my first thought as well. My assumption is that rent increases are offset by property tax and maintenance increases.
But more importantly, the expected resale value of the home needs to be included in the analysis. This tips the scale in favor of buying.
Agreed on that point. In doing my own spreadsheet for my specific case in LA, where I compared renting and owning at almost the same price, I did take into account rental increases and a 4% gain in equity over time, offset by the 6% of the total price, cost of selling and I still came out $30K ahead over 10 years by renting. I also estimated a conservative 5% return on my investments.
Perhaps this is because we’re still starting on our FIRE journey and we don’t have the example’s 700K to feed off of. Our down payment seems to be doing better invested than used for housing.
If we were able to buy outright, that seems to change the equation, as well as having a larger nest egg than we have currently. So maybe that means buying later in life…
While I’m a big fan of numbers, and making financial decisions based on them, I think in this case (where the numbers aren’t huge, and, IMHO, don’t really give a clear ‘win’) I think personal feelings count for more.
If you see yourself settling in one place you really like, you want to furnish/decorate your place exactly as you like without asking for landlord permission, etc, then you might want to buy.
If, like me, you don’t want to be stuck to living in one place for years, then renting is obviously a much better idea.
Getting back to numbers, I know the reader is understandably cautious about property prices, but given that Spain’s prices today are generally lower than they were 12 years ago in euro terms (not even adjusting for inflation) it’s hard to think they won’t get back up at some stage.
I would say that if you have the means to buy a house at a bargain, then always do so despite the cost may be higher than renting, but I do NOT recommend buying outright. Instead, use as much mortgage as possible for the longest term you can get, even if you can afford all cash, because your ROI will depend mostly on your initial cash outlay. If you buy a house, you have equity over that house. The monthly payment you do goes to increase your equity over time and they do not go to waste. Contrary to that, monthly rents you pay are like money burnt, i.e. they do not increase any sort of equity even though they may come cheaper.
Asking whether you should buy a house or rent it is very much like asking whether you should invest $1000 in an index fund vs spending $800 on the next smartphone. And somehow you think spending $800 on the next smartphone is better because it is $200 cheaper. The former is an investment and will grow your wealth, while the latter is expenditure and will not grow your wealth.
And if you buy with mortgage instead of renting, you might get a 3rd situation here, whereby you may spend $600 on monthly payment, but you have extra $100 to invest. The leftover $149,300 can be allocated prudently to further investment or budgeting. And this gets repeated every month. By the end of the mortgage, you would have a house with full equity (i.e. you own a $150,000 asset, assuming the value stays the same over the years) that you can lend out too, collecting monthly rent yourself. In addition to that, you also have made monthly investment of $100 extra which you otherwise cannot if you rent. Neither would you have extra cash to spare for investment if you buy outright. I suspect this 3rd option may have better outcome.
I am daydreaming of trying out the European angle too once we return back to Canada next yearish from China…so I like this Europe stuff…. you guys should maybe ask the YouTubers from Our Rich Journey too guest post for you… they just bought a place in Portugal…they have 2 kids
Too many assumptions are made that favor renting vs buying:
1) Analysis assumes no increase in rent over the years. Don’t know about Spain, but rent increases in my area in the US increase much faster than inflation.
2) Analysis shows only portfolio value rather than net worth. So the value of the house and any appreciation in its value is not included.
3) Analysis assumes no house appreciation. In the US, stocks appreciate faster than unleveraged real estate in most areas. But the leverage gained and tax benefits from having a home mortgage often allow real estate to outperform. One of my biggest financial mistakes was buying my house with cash rather than using a mortgage.
A property in a desirable location increases in value on average about 3-5% per year. This represents equity increase for the home owner, which can be released for other investments or used to reduce mortgage payments.
Contrast that with rental prices which will increase at a similar rate!
This affect compounded over many years is huge, and your analysis fails to account for it.
Furthermore, property ownership is unique in that you can take the benefit of value increase on the total asset price even though you may only own 10% of it (mortgage company owns the rest). It can be highly leveraged investment vehicle.
I am of view that renting makes more sense than owning. This will give one the flexibility on the location independence. If one does not like the place after a significant amount of time, one can move easily without much burden.
My two cents worth of views.
Like with investing in individual stocks vs indexes, it’s going to be hard to, as an individual, buy real estate that beats solid diversified REITs like you suggested Firecracker.
Of course, that’s only if it’s an investment purchase.
If it’s to live in (whether now or in the near future), the math gets pretty wonky pretty quickly since we start to move into emotional value of owning vs renting. That seems like it’s going to wind up being more up to personal preference.
The rent inflation is (to my mind) a huge factor, and is why I chose to buy below my means here in a suburb of Austin, TX rather than face uncertain rent costs; that change hasn’t been factored in. As an astute reader noted, rent increases often outpace inflation. Also, how do the numbers look if you buy with a sub-4% mortgage on 80% of the property cost, stretched out over 30 years, keeping the rest invested? And as another reader noted, the value of house is not included in the net worth calculation. I love the blog, and forecasting is hard. These are additional factors that I considered when making my decision (along with many hours plugging in theoretical numbers on the NYTimes Rent vs. Buy calculator).
He could head over to the subreddit SpainFire for more specific advice: https://www.reddit.com/r/SpainFIRE/
Also as folks pointed out, buying a home is never a 100% financial decision.
I really enjoyed the thorough, though unnecessary, analysis.
Whenever considering rent vs. buy (or buy to rent out) I always consider a quick rule of thumb: 1%
Is the monthly rent 1% or more than the buy price? If yes then buy. If no then don’t.
This case was soooo far off, it was hardly worth doing any more analysis.
i.e. For a $ 150k home, the rent should be in the vicinity of $1500/mo. The rent in this case scenario was less than 1/2 that. Rent without a doubt!
a) The letter author is 49 years old. If he buys he’ll be really happy that he didn’t throw away money on rent in… 65 years from now. He’ll be 109 years old before he breaks even on his investment. He better take really good care oh himself and hope he lives a long life.
b) 3.5% is really conservative. Even 4% was safe and at 4% the advantages of renting increase with time. So, if he buys, he’ll be happy to die sooner than later.
Rent can grow with time but that’s kept in check by the price of homes, local taxes, etc. If the rent approaches or crosses the 1% then buy something.
c) The author mentions North of Spain where he lived for many years. He might know the area well but for someone who doesn’t rent is a must. If you buy a house to live in this is a major life change. Make sure you rent in the area for 6mo to 1 year at a minimum. This allows you to both keep an eye to the local real estate market, potential deals, and to know if you actually want to live in the area.
1% a month equates to an asset that yields over 12%/year. I think your rule of thumb is way too biased towards renting when many rental yields are in the 3-5% range depending where you are
Yeah, 12% would be nice but it gets whittled down when you consider property and income taxes, insurance, and maintenance. Net ends up about 8% for me in semirural NY. There’s no way I would take on the headache of being a landlord for 3-5%. Index funds do better than that over the medium to long term.
The 1% rule makes sense in the US but in Europe there is nearly no place which is coming even close to this number.
In Germany you get a 20 year mortgage for 1%. Plus you dont have to pay it off in this 20 year period. You only have to pay the 1% interest plus a minimum of 1% of the principal per year. As a result everybody in the country is currently buying houses and appartments with rent multiples of 30 or more (would equate to 0,33% rent per month of buying price) with plans to carry the debt virtually indefinitely.
In cities like Munich or Zurich you pay 50 times yearly rent for a place. Its insanity but most people dont know any better. Most people here distrust the stock market and they somtimes have hundreds of thousand of Euros in saving accounts with 0% yield rotting away.
I rent an apartment in Germany for 1.200 Euro per month. Landlord wants to sell it now and is asking for 450.000 Euro. He will get the money from someone. But not from me 😉
Have a nice day
I don’t quite agree with the math here. Although your math is correct, it is useful to look at net worth. Owning the place would increase the person’s net worth and overall weath-wise the person would do better buying from the getgo. We are also safe to assume that the property will increase in value over time.
Also, life is not lived in spreadsheets. There are other human benefits of buying. When you are in your 70-ies and you own your place nobody (unless your building is unsafe or you did not pay the bills) can put you on the street or sell the place from out of under you or use any other strategies to force you out from your unit, so that they can restore it and rent it out for more.
The 150K is not that crazy in the big scheme of things and if the person has the ability to buy, it may be a good idea to do so for post retirement. This is just my own two cents.
Great written down, but-quite possibly won’t work out in reality, never mind eh?