To rent or to buy, that is the question. Financial advisors and wealth consultants continue to recommend that investing in property grows your assets; therefore, this is a good thing, and when compared to paying rent, paying a mortgage leads to the accrual of wealth. Also trotted out is the popular myth that buying property is a safe investment. However, financial analysts will tell you that property, like any other asset class, can decrease in price due to a lack of demand or oversupply. And this does occur in the property market, so it is essential to understand the prevailing price and trend before you decide to invest in property as you would if you were investing in the stock market.
But, as we all know, buying a house is as much about utility as it is about investment; hence, while it is an asset, it also has a consumption element. Not unlike a car or a washing machine, the utility of the house is equally important. A home needs to be able to meet your needs comfortably; as such, the decision to rent or buy must weigh the consideration of utility and asset growth.
Let us consider the rental argument first. When renting a house, it is a relatively simple decision; you maximise the space and the quality of the home based on your income or your budgeted annual rent. You decide the amount of space you prefer or require based on your expected lifestyle. The priorities of amenities, facilities and environs determine the specific unit you choose to call your home. The cost of utilities, proximity to work, school, healthcare and open public spaces also influence the decision.
Buying a house to live in is a similar decision matrix where mortgage payments substitute rent. The additional factors are the property’s future value, annual developer/community charges and applicable tax liabilities if any. These additional factors or charges do not apply to tenants, and therefore while they do not benefit from ownership, they are also unburdened of these commitments. The general assumption is that ownership reduces your expenses, but this is not the case. Furthermore, these expenses are supposedly justified by the increase in the property’s value. But as suggested, property value is determined by demand-supply forces, and if your purchase were ill-timed, your expenses would not be compensated by an increase in property value.
It is entirely possible that the purchase of a property will lead to an increase in your cost when compared to paying rent. In this case, the asset suddenly becomes a liability wherein you are constrained by the inflexibility of your mortgage and falling property prices. The same can be the case of investment properties where you depend on a rental income to sustain your mortgage payments and other charges. Therefore, a fall in rental income can have an immediate financial impact.
A property without a mortgage will undoubtedly fair better under these circumstances because the fall in rental income does not create financial liabilities. And, due to the cyclical nature of economies, a rebound in market conditions will result in the subsequent rise in rental income. The purchase of investment property requires a long-term horizon of purchasing and retaining for continued rental income and long-term appreciation in value. Investors looking for speculative purchases are better suited to look for asset classes with greater liquidity. Speculation on a property is ill-advised for individual investors.
Therefore, when considering the question of renting or buying a house, one must consider the utility of such expenditure and the time horizon of the commitment. Where it is clear that there is a long-term commitment buying a home is the most appropriate decision both in terms of utilisation and growth in asset value. However, for the short term, usually less than 5 years, renting is the greater return on money spent. Renting for these periods absolves future liabilities and provides immense flexibility.
In Ras Al Khaimah, where freehold properties that expats can purchase are only available in Al Hamra, Mina Al Arab, Marjan Island and a few other localities. Additional factors, such as the variances in rent between the city and these developed communities, come into play. The rent in some localities of Ras Al Khaimah is as much as 30% lower for an equivalent house. Thus, even when considering a longer term of stay, it would behove one to consider the total cost of renting the home over the course of this term than buying a house in the developed communities. In fact, it is possible to buy a smaller property in any of these communities and utilise the rental income to pay the rent for a larger home in Ras Al Khaimah city. Whereby you would have an investment on the one hand and still live in a home more suitable to your lifestyle.
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