Reader Case: Rent or Buy in Spain

32 thoughts on “Reader Case: Rent or Buy in Spain”

1. 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.

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   1. Another Calgarian I presume??

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      1. Probably an Albertan

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2. 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).

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   1. Totally agreed !

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   2. Agree, the home value needs to appear somewhere in the calcs.

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3. 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!

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4. 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.

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5. 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.

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   1. I would like to know the name of the REIT too. If it is paying 5% consistently, I’m in!!!!

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      1. WPC I’ve held this REIT for over 20 years. Check the chart

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   2. https://www.bmo.com/gam/ca/advisor/products/etfs?fundUrl=/fundProfile/ZRE#fundUrl=%2FfundProfile%2FZRE

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   3. 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….;-)

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   4. ZRE is the one I have. 5.18% at the moment.

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6. 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?

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   1. 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.

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      1. 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…

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7. 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.

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8. 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.

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9. 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

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10. 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.

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11. 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.

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12. Hi,

    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.

    WTK

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13. 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.

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14. 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).

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15. 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.

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16. 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!
    Other considerations:
    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.

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    1. 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

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       1. 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.

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    2. 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

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17. 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.

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18. Great written down, but-quite possibly won’t work out in reality, never mind eh?

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