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It's a dilemma that many of us have faced — whether, in the current market, it's best to rent a property from a landlord or buy outright. We examine the pros and cons of such a decision.
* Buying a property
There are numerous pluses for purchasing a property outright. The primary motivation for many purchasers is that they are proactively investing in their own future. By taking on a repayment mortgage, owners are creating a valuable asset.
And while the value of the property may go up as well as down, at the end of the term of the mortgage the purchaser will own the property outright. Another major consideration for purchasing property is that it gives the owner freedom to alter or refurbish to suit their lifestyle, giving an option to extend or adapt the property without seeking landlord permission.
Owners also have responsibility for any problems they encounter and do not have to deal with letting agents or landlords to resolve issues.
First-time buyers who wish to get on the property ladder may well consider the process a daunting one but, with the help of a good real estate agent, it can be an invaluable learning process which stands them in good stead for future purchases as well as kickstarting a disciplined approach to financial planning.
Of course it is essential to ensure buyers can afford the purchase. Potential purchasers must firstly consider the deposit.
Expatriates purchasing their first property under Dh5 million now require a 25 per cent deposit and for those above Dh5 million the figure rises to 35 per cent. So, for a property priced at Dh3.76 million, the deposit required would be Dh94,000.
Other fees which need to be factored in include transfer fees at 4 per cent — typically paid for by the purchaser — which would equate to Dh146,928, registration costs (Dh4,000), title deed insurance and DSR registration (Dh1,050) and annual service charges (Dh15 per square foot. So for an average 1,900 square feet apartment in Downtown this would be Dh28,500) and finally the agency fees at 2 per cent — Dh73,464.
This gives a grand total of Dh253,942 which purchasers would need to find before completion, but does not take into account other fees such as for legal, survey costs, and removal charges.
* Renting a property
Renting a property from a landlord is a great option for those people who seek flexibility. It's a short-term commitment and, in most cases, rental agreements may allow the tenant to vacate prematurely depending on the contract and agreement with the landlord, if they so choose to.
It allows renters to dip their toes into a new location to see if it suits them enough to purchase there. It also protects tenants from any adverse market conditions by cushioning them from large monthly mortgage repayments – renting means it's impossible to fall into negative equity, for example.
And, once a rental agreement is in place, whatever the market conditions, the rental amount remains the same for the duration of the tenancy contract, but can be increased subject to Rera (Real Estate Regulatory Agency) regulations on the end date.
Finally, contracts can state that your landlord has partial responsibility for the upkeep and maintenance of the home, which is commonly for major matters above Dh1,000.
Financially, however, renting a property isn't always the most cost-effective option. If we break down the costs of renting a property at Dh150,000 annually, we see that the housing fee works out at 5 per cent per year, which, taken over a five-year rental period equates to around Dh39,000.
This figure takes into account that rent will increase by 3 per cent per year on average. The total figure for rent over the five-year period is around Dh780,000. When added to such costs as agency fees (approximately Dh5,000) and tenancy contract renewals (Dh4,000 over five years), this brings the total amount to somewhere near Dh828,000.
Naturally, the decision on whether to buy outright or to rent will depend on personal circumstances and preferences. However, when we look at the outlay involved, in the long term it makes more hard financial sense to purchase a property than to rent, with the caveat that the purchasers have done their sums and are confident that they can afford it.
Find out when is the right time to buy
Source: Gregory Lewis, Special to gulfnews.com
The writer is Senior Negotiator at Knight Frank