A lot of people in the World own their own homes. Home ownership rates in Europe vary from Germany at 53% all the way to Romania at 96% (the USA is 65% and India is 86%). There are lots of reasons to own the place you live in, some people inherit, some people fall in love with it, others want to make their mark on the property by renovating, some people like to put their money into something they can touch (bricks and mortar) and still others think they can make money by buying at the bottom and selling at the top.
If you are looking at a property as an investment, then read my “Why is Property Such a Good Investment” and “How Long Do You Have to Stay For Buying to Make Sense”.
As a real estate agent my job is to sell those intangible factors that makes someone fall in love with a property but even more than that I like that buying makes financial sense. Personally I am more of a mathematical person, I come from an investor background and I like to sit down and I like to go over the sums with my clients. Almost universally they are shocked at how a home is actually a yielding financial investment.
If you are worried that if you buy today then tomorrow you will have lost money on your investment then read my “How to never Lose Money on a Property Investment”.
Lots of people have made money from property in the past, and almost to a man will say it is because the property went up in value. One of the main reasons people like to buy investment property is to take advantage of these price moves. But, like purchasing shares on the stock market, people don’t realise that the investment will actually bring in more consistent yields from the dividend than the price increase. To benefit from a price increase you need to be a stock picker (be able to know which way the market will go), but to benefit from the dividends you just need to hold it.
It almost always makes sense to buy the house you live in, even in average market – Why? because if you take everything into account, even if your property doesn’t appreciate in value one fil, it could almost halve your rent.
I’m going to use an example of a one bed apartment we currently have for sale at AED 1m, renting for around AED70,000 per year with service charges of AED10,000. I have made the number pretty easy but a 6% net return on property in the UAE isn’t that hard to find, even across villas and larger apartments. I will assume a buyer with a 25% deposit which is AED250,000, with the remaining AED750,000 financed at 4% over 25 years. So how will buying almost halve your rent?
Your first saving is when you consider your rent against what your bank repayments would be. It is a simple calculation, your rent on these units is AED70,000 per year if you are a tenant, if you buy it your finance repayments would be only AED48,000 per year (you get to pay this monthly, so just like 12 cheques). As you are an owner you will have to pay an extra AED10,000 in service charges making AED58,000 in total, a saving of AED12,000 per year, effectively a 17% reduction on your rent. This is the bare difference between being a tenant and an owner. But 17% is nice but it isn’t half, so how do you get that extra bit?
If you own your own property then in the first year about one third (or AED18,000 in our example) of your finance payments to the bank goes to paying off the principal of your loan (the other two thirds or AED30,000 is interest payments). You can see an amortization schedule here. This is money essentially going into your pocket as it is taken off the amount you owe the bank, so when you sell the unit, even at what you bought it for, you get to keep this.
So to recap, instead of paying AED70,000 in rent – if you buy you pay AED48,000 in finance charges and AED 10,000 in service charges, a total of AED58,000. You then get a credit of AED18,000 by reducing your loan amount by that amount, which is realized upon sale. So instead of outgoings of AED70,000 you are now only losing (after the credit for the loan principal repayment) AED40,000 – almost half the amount of your rent.
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.
