A lot of people say to me “I’m only going to be here for a few years, surely buying doesn’t make sense”? But what is the actual truth? If you have read my articles “Why is Property Such a Good Investment” and “How Buying Property Halves Your Rent” then you will understand what a great investment property is, but over what time period does it make sense to invest.
One approach, and I discuss this in “How to never Lose Money on a Property Investment” is not to look at a time horizon. If you buy here and need to leave you can have your property managed by us here at Crompton Partners or one of the banks, your mortgage will be paid and the additional rent sent to you. But if you want to know the exact figures and the time horizon within which buying makes sense, then I have set them out below.
Let us take an example where you buy and sell a property for exactly the same value (many real estate agents will try and tell you that you will make huge capital appreciation gains but let’s keep it to a base case scenario). So there are costs to buying. In Abu Dhabi those costs are roughly 4% of the value of the property made up of 1% transfer fee (legally now transfer fees are split between buyer and seller), 2% broker fees and 1% on other bits and pieces like admin/mortgage costs etc. In Dubai transfer fees are 4% so if the buyer pays half that is a total cost of 5% of the value of the property.
So how long does it take to make back that 4% of the value of the property for you to “break even” and then start making money from your purchase? If you are worried you won’t make money from it read “Why is Property Such a Good Investment” and “How Buying Property Halves Your Rent”.
Let us take the easy scenario where you buy cash. The standard yield on a property in Abu Dhabi is about 6% net (net meaning after service charges). So for example if you buy a property for AED 1m you would expect to make AED60,000 per year of pure profit if it is an investment, or if you are living in it this is a AED60,000 saving as you aren’t paying any rent. Your costs to buy this AED 1m property were 4% or AED40,000, so after one year if you sold the property at what you had bought it for you would have made a profit of AED 20,000!
So it makes sense to buy even if you are only here for less than one year!
Don’t believe me? The sums are all there for you to see.
Now let’s use a slightly more complicated scenario where you are using finance. Let’s us use the figures above but assume that you have a deposit of 25% and the rest is financed at 4% interest over 25 years. The bank payment will be AED48,000 per year (you get to pay this monthly, so just like 12 cheques). Approximately one third of this payment or AED18,000 will be a principal repayment (so taken off the loan) and 30,000 will be pure interest for the bank. You can see this by using an amortization calculator here. So as above you will make AED60,000 profit for the rent but AED30,000 of that will be lost in interest charges (the AED18,000 will not be lost as it will be removed from the loan amount and realised upon sale). So your profit will be AED30,000 which means you will need to hold onto your property for just over one year to be able to break even. Hold it any longer and you start making money.
And when you buy you pay interest charges to the bank monthly, so no huge rent cheques.
Crompton Partners is the largest Property Agency in Abu Dhabi and we would be happy to talk to you about anything regarding sales or leasing in the Nation’s Great Capital. Please feel free to call me on 050 6145199 or email at ben.crompton@cpestateagents.com.
