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I have a very simple question - rent or buy a house in a poor country when you have a stable income?

There are many articles on this topic but I cannot find the right solution for my specific case as most of the articles are targeted for countries where the financial situation is different. I'll present you the facts first:

  1. I live in a poor country where the minimum salary is ~ 200 EUR per month
  2. The average salary in the country is ~ 400 EUR per month
  3. My salary is ~ 2000 EUR per month (I work for a foreign company)
  4. A nice place to live costs ~ 60 000 EUR
  5. I have already in my bank account ~ 30 000 EUR
  6. My rent is ~250 EUR (I live in a luxury building)
  7. The interests rate for deposits in our banks are ~1% per year
  8. The interests rate for loans in our banks are ~6% per year
  9. Currently I can save ~500 EUR per month after rent, food, taxes, etc.
  10. I am on a very stable job position
  11. I don't have any kids yet

Here are my thoughts:

If I get a loan for the remaining 30 000 EUR I will have a place to live and I can pay 750 EUR per month (500 + 250 as I won't pay any rent). At this rate I will be able to pay the loan in less than 4 years. I will have to pay ~ 4 000 EUR in interests for those ~ 4 years.

If I try to collect the remaining 30 000 EUR cash I will have to wait ~ 60 months. Meanwhile I will have to pay the rent for those 5 years and at the end I will have the same house but 1 year (and even more) later and meanwhile I will have to pay ~ 15 000 EUR for rent (60 * 250). In this time I will have my current 30 000 EUR in a bank with a 1% return rate or ~ 300 EUR per year when I start and ~ 600 EUR per year at the end of the period. This is an average 450 EUR per year for 5 years so I will actually have lost 15 000 for rent - 2 250 = 12 750 EUR for those 5 years.

Does that mean that buying the house will save me 8 750 EUR? Is there something that I'm missing?

P.S: I understand that in general this is not the case - in most cases people around me get a loan for 15-30 years and there the whole picture is very different.

  • 2
    How is 750 EUR only 250 more than 250 EUR? – BrenBarn Aug 26 '15 at 19:47
  • Currently I can save ~500 EUR and I pay 250 rent. After I buy I won't have to pay rent so I can pay 500 + 250 to the bank for the credit. – Wy. And Aug 26 '15 at 19:51
  • 3
    But you'll be paying 750 EUR in mortgage payments. If you currently pay 250 rent and save 500 per month, and you buy a house that requires you to pay 750 per month, then you won't be able to save anything. Is that what you mean? It's true you can pay it, but that doesn't mean it's "only 250 more". It's 500 more, which will reduce your savings rate by 500 per month. – BrenBarn Aug 26 '15 at 19:55
  • 5
    Intangibles to consider: You don't say where this is, but some poor countries are quite unstable. What is the risk of losing the house (damaged, destroyed, confiscated) due to political instability? Do you enjoy security features at your luxury rental (guards, etc.), and would you have those similar at your bought house? And what about amenities (pool, spa, house cleaning, etc)? Are there any you like but would not have at a house? – Patches Aug 26 '15 at 23:23
  • 4
    Also remember to take into account in your calculations property taxes, house insurance, and any kind of fee or service you'd have to pay for that's in addition to the mortgage. – Patches Aug 26 '15 at 23:24
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Your calculation sounds right. Here's another way of reaching roughly the same figure that hopefully explains more clearly where the saving is coming from:

  • The cost of the house is effectively the interest on the money used to buy it. Initially that consists of:
    • lost interest on your existing savings: 1% of 30000 EUR = 300 EUR/year = 25 EUR/month
    • interest you have to pay on your loan: 6% of 30000 EUR = 150 EUR/month
    • That makes a total of 175 EUR/month
  • By the end of the loan it's just lost interest on 60000 EUR = 50 EUR/month

So very roughly owning the house saves you a lot of money compared to your current rental: 75 EUR/month initially, rising to 200 EUR/month at the end of the loan.

If we calculate very approximately, the average saving over the lifetime of the loan is 137.5 EUR/month, or 6600 EUR over the 4 years. Then add on the final year at the full 200 EUR/month to get a fair comparison with renting for the 5 years while you save up the same 30K, you get 9000 EUR.

Of course, this calculation ignores the costs of owning compared to renting. There'll be various extra costs depending on the country which will cut into the projected savings.

For example upkeep is often quoted as a very rough rule of thumb as 1% of the value of the house per year - i.e. maybe 50 EUR/month or 3000 EUR over the 5 years, taking your total saving down to 6000 EUR.

There's also buildings insurance, and perhaps property taxes. If property taxes always fall on the owner then that's a completely new expense, if they fall on the occupier then the new cost is just the difference between the taxes on the house and what you're paying now on the flat.

Finally, you're also taking a risk on the house losing value over that time - though it might also gain.

  • In my (American) experience, "1% of the value per year" rule of thumb is not accurate at all. – Jasper Apr 7 '16 at 12:59
  • @Jasper inaccurate in which direction? – GS - Apologise to Monica Apr 7 '16 at 13:28
  • I've heard suggestions of setting aside 5% of the house value each year for large repairs like roof, furnace etc. I think that's excessive: after 20 years you'd have set aside the entire value including the land, and you don't replace the entire house in that time. But 1% is low. 2-3% for "reserves for big stuff" for sure, and perhaps 1% for smaller things like painting, landscaping, and minor repairs. – Kate Gregory Apr 7 '16 at 17:43
  • @GaneshSittampalam -- It depends on the house, its age, what it is made of, local labor rates, local regulations and taxes, and how much the house is worth. For example, a $50,000 mobile home might need to be replaced after 20 years. And the cost of kitchen appliances, foundations, exterior walls, and roofing might be identical on a short $200,000 1,500 square foot home in a small city, versus a tall $800,000 3,000 square foot home in a fancy suburb. It is possible that all three houses might need a $4,000 per year budget for upkeep and/or replacement. – Jasper Apr 7 '16 at 18:25
2

It is almost always cheaper to buy a house than to rent a house, because the landlord has to cover all the payments (mortgage, property tax, utilities, maintenance etc) out of the rent, and has to charge a little more than that to cover their time being a landlord, the occasional month between tenants, repairing damages from bad tenants, money lost from tenants who skip out without paying, and so on.

In your case you have not demonstrated that it is much cheaper, though. You have not included any allowance for payments other than the mortgage. Depending on where you live these could add another 50% to your expenses. These include minor and regular things such as trimming trees, painting, replacing or fixing broken doors, drawers, light fixtures and so on as well as setting aside money for large expenditures that happen every decade or so (roof, heating system, new flooring throughout, ...) Then there are property taxes, insurance, and payments for utilities like electricity and water. You must investigate these before making your decision. As well, there may be costs (legal fees or commissions) associated with buying, and there are most certainly costs associated with selling. Depending on the length of time you plan to own the house, these could drown out other savings entirely.

Finally, there's the matter of the rising or falling house value. In some markets it's actually cheaper to rent, because the landlord expects to make a million or more from the rise in value of the property, and so whether the rent is 2000 a month or 3000 a month doesn't really matter - having a good reliable tenant who doesn't cause any trouble becomes top priority, and that tenant may not face rent increases even though the house price is skyrocketing. You need to understand your local housing market to see if it is in a possible bubble or otherwise displaying irrational pricing. I know someone paying 2000 a month to rent a house that would cost 6000 a month for the mortgage if he were to buy the same house. But they are in a bubble.

  • I would replace your first statement with "It is almost always cheaper to own a house than to rent a house". There's a significant fixed cost associated with buying and later selling, so you need to stay long enough for the ongoing savings to offset that. – GS - Apologise to Monica Apr 7 '16 at 16:57
  • Good point @GaneshSittampalam, I've added that to the costs section. The first sentence stands - the distinction between buying and owning isn't significant here. – Kate Gregory Apr 7 '16 at 17:41
1

From an economic point of view a poor country is likely a developing country. So the value of a block of land and a house, especially in a good location, could increase a lot over the next few years/decades. So you could see it as a good long-term investment as well.

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