Expense or investment

PW takes a look at the pros and cons of renting and buying propertyEdward Mainwaring-Burton

It can often be difficult to climb those first few rungs of the property ladder. It doesn’t matter whether you are a student moving away from the family home for the first time, or a professional relocating to a new city to follow your career. The first question is where to live; the second is often whether to rent or buy.

The greatest problem with spending on real estate for accommodation is that it is misunderstood and oversimplified. When looking for a home, most people will always lean towards either renting or buying and rarely consider the pros and cons of each in the circumstances. A property bought with cash can prove profitable. Paying a year’s rent in advance can protect against rising prices. However, if that money could itself be generating a return, there is every incentive to borrow what you need as a loan or mortgage and profit from the rising markets.

Of course, the opposite is also true. Borrowing money and tying it up in an asset that is stagnating or falling in value can be disastrous. Negative equity can be crippling and must be avoided.

The difficulty for the everyday investor when considering rental property is that most of us will not look upon a rental contract as an investment. A mortgage is clear enough. The bank wants the borrower to pay as much interest as possible for as many years as possible. The borrower wants the maximum loan with the minimum repayment and cost. Fluctuations in interest rates and real estate prices must be considered and can benefit or harm either party.

Renting a home

When renting a home, very similar factors must be taken into account. The longer the rental contract, the more chance there is that prices will fluctuate. The more frequent the payments, the greater the flexibility for the tenant to use their money to generate returns. In a rising rental market, a landlord will be eager to accept a monthly payment, given the opportunity to raise prices every 30 days. When the market is unstable or demand is low, an annual cheque and a long contract becomes much more attractive. The tenant should always fight for the contrary but, when it comes to property, more than any other asset class, we are tempted to make decisions with the heart, rather than the head. Bricks and mortar have a curious power to make us abandon our rational thought and allow gut feeling to rule our choices.

When renting a property, I always advise clients to look at the opportunity cost. What are they giving up with each choice they make? What else could that money be used for? Would that same monthly expense be able to generate a real return for you? Could you own an asset at the end of that contract?

Buying property

When buying property, I recommend to my clients that their first decision should be the curtains: If you buy curtains your family likes, you are buying a home. Whether the price goes up or down, that house or apartment is a roof over your head, your castle. If you buy curtains your neighbours like, you are making an investment. Take emotion out of the equation. This is an operation strictly for profit.

In most regions, the price of real estate presents an interesting dichotomy. The newest, most modern and advanced properties will be the most desirable but the increasing development of available land will drive up the price by area of existing, older constructions.

This has led to the prevalence of renovations and property developing in European and American cities. Scarcity of new building land makes the recycling of old buildings not just necessary but often very profitable.

Here in Dubai, as with many emerging market cities, the abundance of land to be developed and new projects in progress have given much more importance to transport links.

As London in the 19th century swelled and prospered around the railways and canals, Dubai property prices will be skewed by proximity to major roads, junctions, access to the Dubai Metro and now also the Dubai Tram.

The most beautifully fitted and finished building, if located too far from the travel routes, will make a poor investment but could be rented as a bargain. A lowquality project in an area due to be connected to the city’s commuter arteries can potentially offer a rapid rise in price for a speculative buyer.

For renting your home to be considered a good investment, remember that there must always be another part to the operation. Taking out a mortgage to buy a house is of no benefit if the rest of your money is left in the bank, earning no interest. The cash that you retain should be well employed and should be made to work as hard as you do. In the same way, savings you make as a result of negotiating a good rental contract should be put to good use and not left to fester and rot away to inflation.

Professional guidance

The best advice is that you take lots of advice. Remember that a letting agent will always want you to rent. A real estate agent will always want to make the sale. Your accountant or financial adviser will be able to give you an objective and professional appraisal of the benefits of renting, buying, letting or selling and how best to maximise your assets and protect their value. Any time you part with your money, it can be an expense or an investment. The right decision and some professional guidance can be the only deciding factors.

Source: Property Weekly


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