Renting Or Buying, The Pros And Cons
We have all been told that renting versus buying is a no brainer and renting is dead money and with buying you get to own the property and the subsequent increases in value. If you are purchasing a property on a mortgage instead of paying rent you are
gradually buying the house from the bank over a fixed term period as they have loaned you the capital to buy the house.
However, this is simple economics and the reality is more complex as explained further in this article. The growth of property prices in the west has been driven by easy credit and in the UK by a shortage of houses and the buy to let market. However over the past year we have seen in the USA and the UK the bursting of this bubble in that house prices have become overstretched and are now falling. In Spain the overbuilding has led to many apartments being left unsold and falling in value as individuals holiday homes have not become the money magnets that they were claimed to be. In the Far East we have seen developments promoted as buy to let with high rents and easy profits as property prices rise. This is dependant on a number of factors – people wanting to rent the properties, rising values and being able to sell them. Most of the properties marketed to individuals in the popular areas of Thailand seem to be to overseas owners or expats. Also when you come to sell you need someone to sell to which given the costs of these properties is likely to be another westerner with money and this depends on how attractive Thailand is to live and do business in at the time you come to sell.
There are other issues when buying abroad in that the rules can change arbitrarily and not always in your favour. Many expats who have bought in Goa in India have now found that the rules have changed as the locals objected to overseas national buying properties and putting prices out of the reach of locals. They have in effect lost their money as they now only have short term leases on their properties. There have also been problems in Marbella in Spain with illegal developments and the Spanish rezoning law. We all know that official rules can be changed at short notice and not to the benefit of existing owners. Also the fact that overseas nationals buying up properties in a country and raising the prices beyond what the average Thai citizen can afford could lead to a long term backlash.
Also at the time of writing the Thailand political situation is fluid to say the least with the coup and the recent elections. With the worldwide credit crunch investment is going to be problematic and the holiday season this year is likely to be bad so not many apartments will be sold. This is despite developers and resale agents trying to resell apartments. Trying to resell an apartment if the economy is in recession or the political situation is fluid can be very problematic. Also with the visa renewal issue etc, the government can change the rules and you may find that you cannot get the visa renewed or it will be but under much tighter restrictions. This means you have capital in the form of property in which you are then a forced seller or have to rent out.
As regular readers are aware foreigners are not allowed to buy houses, but only condos in LOS. I know there are ways to get a lease etc. A number of foreigners have bought houses in LOS and when their relationship has gone sour they have had problems with them ending up with nothing as the house was in the wife’s name! In one particular gentlemen’s case his wife and her lover murdered him <I would suggest that this has happened many time, not just one! – Stick>. Now if he had been renting instead of buying he could have done a runner and sat in a bar getting drunk and maybe even living to tell the tale to all his expat mates and living off his lucky escape for a number of years.
If you have worked hard all you life why do you want to put your life savings into a house? Madness! In the event of a divorce you have to give at least half to your ex-partner. If you were married before and went through this process you obviously did
not learn a lesson the first time around or you are just plain stupid. You are better off renting and keeping the capital for a rainy day or in case of emergencies such as medical care or need to relocate in the event of relationship or other
Some of the other benefits of renting are that your landlord should take care of any problems if it is a furnished apartment. The maintenance should be done by them, so you will not have any additional expenses even over a number of years, Maintaining an apartment block starts to get expensive after the first decade as the lifts break down and the décor and other parts need to be repaired. This is providing they do this in the first place and maintain the property. The other point is that if you do not like your neighbours you can relocate somewhere else. Your real estate agent is not going to tell you of problems before you move in as he is trying to make money off you. This was explained in detail in Stick’s weekly column of 31 August 2008. <And many local FARANG real estate agents are TOTAL schmucks, preying on the uninformed for the HUGE commissions they make off a single sale – Stick>
Now for financial elements which should be a guide. I have picked a reasonable sized apartment in a popular beach resort to give an idea of costs.
To purchase a two bed two bathroom apartment, 114 square metres, in Jomtien costs 4,400.000 baht. Given an English exchange rate of 55 baht to the pound this works out as £80,000. Not that cheap for a two bed apartment in a developing country.
To rent the same costs around 35,000 baht per month. Or 420,000 baht per annum. This works out as £637 per month. Again this is not cheap for Thailand. As on this rental it is about a 10 per cent return on capital in one year gross. Normally you would be looking for less than this, nearer 5 to 7 per cent.
If your money is invested abroad and you are receiving interest then your money is working for you. There is also the fact that tying up a large amount of capital means, in pure economics terms, that there is an opportunity cost to investing the money as if you have the money invested in a saving account you can access it if you need the money in an emergency. With property this is a long term investment and getting your money back could take some months and not at the same level of money that you originally invested in. Sure, you are going to be paying rent which may exceed what you could earn from your saving but the capital loss on this over the first few years will be minimal. If you are earning say 7 per cent per annum on your savings this would be 308,000 baht as opposed to rental of 420,000 baht, then you would be losing 112,000 baht per annum. This does not include any capital gain or loss on the capital if invested in property. You would not lose too much capital in year one.
By any measure the prices for property are way above the reach of the local population and the monthly rental alone is more than the average Thai would earn in a month so if you are looking at renting then it will be to either rich nationals or expats. If this source of revenue dries up then you will have an asset yielding zero and costing you money each month.
At the end of the day if you decide to buy in Thailand you are taking a risk on the political and economic risks of the country. To me given the global economic uncertainly and a global recession renting may be the smarter move in the short term which is up to five years as you have the flexibility to relocate at minimal cost.
No arguments from me whatsoever. While some have done well buying, I think the downsides are just too great.