Is Buying Property Always Better than Renting?

• 15 December 2020
• Local News
• 2675 Views

Most people believe that renting a property is a waste of money as you are throwing away your money every month. Rather than helping the landlords pay their mortgage, why not buy your own property? However, this is not always the case. In some circumstances, renting might end up giving more profit compared to buying.

According to Fidelity, there are arguments both for buying and continuing to rent, depending on each individual’s financial circumstances and lifestyles. Here are things to consider before deciding.

Buying comes with costs

For most buyers, the only cost they consider is the mortgage and interest. However, buying and selling property involves many other different costs that most buyers and sellers overlook. Those costs include the down payment, stamp duty tax, property tax, brokers’ fees, bank fees, processing fees, appraisal fees, house insurance, and maintenance costs, among others.

In Cambodia, in most cases, you have to pay at least 30% of the house price as a down payment before being able to get the loan, and the average interest rate for a mortgage is about 7-8% per year. Meanwhile, bank fee ranges from 1% to 3%, stamp duty tax is 4%, and property tax 0.1%. Meanwhile, the commission, insurance, and maintenance fee can vary depending on the companies or services you choose.

The simple calculation is that you sum all the costs per year and divide it by 12. If the renting fee is lower than the buying cost, you are better off renting. However, most people do not buy this concept. They believe that despite the high expenses, buying is always better as they will have a property in the future, hoping that the price will appreciate.

Is renting really a waste of money?

There two points to consider here. First, there is no explicit guarantee that your house price will go up, especially given the COVID-19 pandemic. Second, renting is not always a waste. What if you use the average cost per month that you consider paying to buy a house to rent a cheap property? Then, you use the remaining funds to invest in stock or other businesses. Probably, you might earn more profit in the long run.

According to a portfolio manager of PWL Capital Inc., Ben Felix, the nominal return for real estate globally is approximately 3% per year on average. However, the stock return rate is at 6.57% per year. Moreover, selling a house always comes with costs such as capital gains tax, commission fees, and other hidden fees. In contrast, stock is far easier to trade.

Besides, according to Fidelity, putting too much of your savings into one single investment or just on your house could be riskier than investing in a diversified investment in stocks and bonds, especially over the long term. However, if you buy multiple houses that you need to invest in, you will face a large mortgage, which might eat up all your savings for unexpected emergencies, your retirement, or for your kid’s education.

The comparison between stock and real estate might not be very relevant to Cambodia. However, it is also one factor to consider before deciding to buy a property.

Renting provides more flexibility

According to Investopedia, beside the benefits of avoiding high costs such as down payments, taxes, and maintenance fees etc, renting is better than buying for some individuals due to the greater flexibility, lower risk, and affordable access to amenities, such as a pool or fitness room, that might otherwise be prohibitively expensive.

Flexibility is very crucial for some individuals, especially during COVID-19. Flexibility here refers to both financial flexibility and flexibility on where you live. For example, in terms of financial flexibility, if the pandemic disrupts income, renters can easily move to a smaller alternative that matches their budget.

However, homebuyers are stuck with the mortgage. It is tough to break free as selling a house is not always easy, and it always comes with costs. Regarding the flexibility on where you live, renters can live practically anywhere, while homeowners are restricted to areas where they can afford to buy.

To sum up, owning a home can be beneficial over the long term due to the amount of equity they acquire in their home. Renters have nothing tangible for years of rental payments if they do not invest in stocks or other business. Moreover, for those wanting to avoid home ownership hassles, maintenance costs, and property taxes, renting might be a better option. At the end of the day, it mostly depends on each person’s lifestyle and financial situation.

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