Is renting throwing money away?

One of the most important financial decisions we can make is to buy a house.

One of the most important financial decisions we can make is to buy a house. For years the belief that "owning a patrimony" represents the highest point of personal fulfillment. However, the accelerated growth of cities has also raised the cost of living in them. Property prices showed an increase of 4.3% , which inevitably leads us to the following question: is buying a house the best way to invest our money?

Some say that rent is equal to wasting money. Reality is not that drastic. The payment of an income covers our right to occupy a home, so ensuring that it is throwing the money in the trash would be equivalent to say that paying for any transport, public or private, instead of buying a car is also a waste of money.

The decision to buy or rent must be consistent with the situation and lifestyle of each person, and the pros and cons of each option must be evaluated before deciding.

Basing our arguments on the financial security granted by the acquisition of a property is not necessarily successful, you assume that in the future your family will be more valuable to have a house whose initial value was four million dollars than to have the same amount in the bank and the freedom to invest them as best suits them.

In fact, properly managed, a person who rents can generate the same or even more wealth than a person who chooses to buy, but this will depend on factors such as the rental price of the property, the percentage of down payment that this person could allocate to the purchase of the same one (and that collaterally it would diminish the interests to pay).

We go in parts: to determine what is better financially, whether to buy or rent, it is necessary to understand that the payment of the monthly payment of a mortgage loan is formed by two parts: the one that you pay to the capital and the one that goes to the payment of interests. In the case of the rental of a property, the monthly fee only consists of the amount of your rent, so that, in case of obtaining an income less than the monthly payment of a mortgage loan, you have the possibility of investing the part that does not require you pay interest on alternatives that generate returns.

As an additional indicator, there is an economic principle called Price to rent ratio that can serve as a reference point to determine if, in a particular area, it is better to rent or buy, this will be calculated with the relationship between the prices of a home and the annual rent of the same.

Calculate this ratio is quite simple; basically you have to divide the sale price between the annual rent of the property in question. The theory of the Price to rent ratio tells us that, if the result is higher than 20, it is much more convenient to rent than to buy, and if it is less than 15, you should take the opportunity to purchase. If the figure is between 16 and 19, you will have to evaluate other points such as the time you plan to live in it, the interest on your mortgage, etc.

Let's make the numbers with a department in Sunny Isle with a value of $4 million and a monthly income of approximately $ 15,000.

The ratio is 22.22; this means that, according to this theory, it is more convenient to rent it than to buy it. Why? Because the higher the ratio, the home you are buying today will have to acquire greater future value in the future so that it is truly worth what you are paying for it.

Now let's check this theory with more numbers:

Pedro wants to buy the department of the previous example, but he only has enough money to pay a down payment of 15% of the value of the property, so he will acquire a credit of $ 3,400,000 that he will pay for 25 years with a real annual rate of 10%. In this way, Pedro will pay $30,896 month after month. That is, at the end of the loan will have paid $9,268,747 for that department without counting the down payment, this is more than double the original value.

If Pedro decided to rent instead of buying, he could allocate $ 15,000 a month to the rent payment, while the remaining $ 15,895.83 could invest them, and depending on the instrument in which he spent, he would be able to pay those $4 million in cash.

So, at those levels, it makes sense to consider renting and investing the rest of the money in an alternate vehicle. This investment could be the Stock Market, a Personal Retirement Plan ("PPR"), voluntary contributions to your Afore or an Investment Fund. It must be taken into account that, if you decide to buy that department, you may lose the opportunity to obtain the benefits of the investment mentioned above options.

On the other hand, Ana is evaluating the same options, renting for $ 15,000 or buying a department of $ 1,500,000. The ratio gives us 8.33, indicating that it is better to buy. And the monthly installment of your mortgage loan, assuming a down payment of 15% and a rate of 10% at 25 years, would be $ 11,585, so you would even be saving money monthly when making payments on your credit.

It is worthwhile to carefully analyze all our options before buying or renting a house. There is no absolute answer about what is best, everything always depends on the set of situations that surround your decision, such as the value of the home, the amount of the down payment, the possible surplus value, the amount of the credit, interest rates, the time you plan to live in each place, your family situation, among many others. My advice is to invest your money in the most intelligent way possible, looking for options that generate a higher value equity or returns in an investment product and that will ensure a better financial future.