Does rent­ing re­ally pay?

Financial Mirror (Cyprus) - - PROPERTY - Μy Antonis Loizou

This never-end­ing ques­tion i.e. to buy or rent, comes up all the time. It is a ques­tion that most young peo­ple with lim­ited funds as well as other buy­ers re­quire to ad­dress from time to time.

It is ev­i­dent that when one buys real es­tate, the rental payable is saved and as the lo­cal say­ing goes, “you do not throw the rental money down the drain”. Fi­nanciers un­der the present cir­cum­stances re­quire own cash con­tri­bu­tion which could amount to 30%-50% of the to­tal cost, an amount not read­ily avail­able even for an or­di­nary apart­ment of say EUR 200,000 (un­less the par­ents con­trib­ute) plus the an­nual Mu­nic­i­pal and prop­erty taxes, that are at­tached to own­er­ship etc. In some cases, these taxes on the own­er­ship could amount to the equiv­a­lent of up to 10% of the rental in­come.

At the same time, with the vari­able in­ter­est rates on loans (if one is lucky enough to se­cure one) in­ter­est charges could amount to the rental level if own con­tri­bu­tion is e.g. 25% or less. At the time when loans were eas­ily avail­able and when cap­i­tal ap­pre­ci­a­tion on real es­tate was 5%-8% p.a., the ac­qui­si­tion Vs rental made some sort of sense in fi­nan­cial terms.

Lo­cal in­ter­est rates (see UK) on hous­ing of around 2.5%3% (de­pend­ing on own con­tri­bu­tion) the loan in­stal­ments could amount to a level lower than the payable rent, but again the down pay­ment is a prob­lem. As cir­cum­stances are at the mo­ment and with the low re­sale prices, the pend­ing fore­clo­sures and the job in­se­cu­rity that pre­vails it could be that rental is to be pre­ferred at least un­til the mar­ket sta­bi­lizes. On the other hand, it is an at­trac­tion for Cypri­ots ac­quir­ing an as­set (75% of the lo­cals own their homes) which could be sold in the fu­ture, mort­gaged for fu­ture needs and of course passed on to the chil­dren (the dowry tra­di­tion is not gone yet).

It is in­ter­est­ing to note the fol­low­ing sta­tis­ti­cal data pre­pared by RICS (Cyprus) which al­though not 100% cor­rect it pro­vides an in­di­ca­tion.

In the “good old days” with the de­posit rates at around 5%, it made more sense to rent (but see the loss on cap­i­tal ap­pre­ci­a­tion). Nowa­days with de­posit rates at ap­prox­i­mately ±1% it means more at­trac­tion to buy (the 30% de­duc­tion for tax from de­posits in­come in ad­di­tion).

What one will re­alise is that in most cases it makes also more sense to buy some­thing ready (e.g. house) as op­posed to build. Prices are now at a level be­low their con­struc­tion/re­place­ment cost, whereas ask­ing prices are usu­ally con­cluded at a dis­count, the level of which de­pends on the fi­nan­cial need of the seller (the Banks sales in ad­di­tion at most at­trac­tive prices and fi­nance to go for wor­thy bor­row­ers).

Buy­ing ben­e­fits for buy­ers, is that one can con­trib­ute to­wards im­prove­ments/ main­te­nance of the unit which adds or main­tains its value, not hav­ing to put up with at times ob­jec­tion­able land­lords and hav­ing al­ways the pos­si­bil­ity of

Gross in­come

Com­mon ex­penses ten­ant (or in­clude in the rent-bet­ter) Prop­erty and Mu­nic­i­pal taxes Sewage taxes

Main­te­nance (mi­nor)

Re­pairs

In­sur­ance

Pe­ri­od­i­cal up­grad­ing

So, the net in­come could be much less than the quoted re­turns above, es­pe­cially bear­ing in mind the un­fore­seen ex­penses (the non-pay­ment of rent by ten­ants and va­cant pe­ri­ods apart).

Those who de­cide to buy must bear in mind that their fi­nances should have some sort of room for elas­tic­ity from the costs in­volved. This is im­por­tant bear­ing in mind the still high un­em­ploy­ment rate (down from 16.7% to ±10% when orig­i­nally 3.5%) and the in­se­cu­rity of long-term em­ploy­ment which now plays an im­por­tant role in or­der to as­sess the sus­tain­abil­ity of one’s in­come and ca­pa­bil­ity of loan re­pay­ment.

www.aloizou.com.cy

Antonis Loizou F.R.I.C.S. is the Di­rec­tor of Antonis Loizou & As­so­ciates Ltd., Real Es­tate & Projects De­vel­op­ment Man­agers

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