To Buy or to Rent? A Long-Term Profitability Analysis

It’s not an easy decision, and there are many considerations and factors to take into account.

The Tecnocasa Study

Tecnocasa offers a study which concludes that paying a mortgage is more cost-effective than renting.

It indicates that renting, although initially cheaper, results in paying thousands of extra euros in the long term.

And this is the case regardless of the economic situation or macroeconomic context in which we find ourselves. This even applies to the property’s location in any city.

The analysis was carried out considering 670 Spanish cities based on the situation of renting a property for 900 euros per month or buying it for 250,000 euros with a 200,000 euro mortgage over 25 years at an interest rate of 4%.

It also takes into account that the annual rent increase is 2.3%, based on the average inflation in Spain from 2002 to 2023.

Well, with these figures, the person who has rented has finally paid 359,496 € and the one who has bought the property with the mortgage has paid 316,702 euros, that is 43,000 euros more.

This study clearly indicates that it is more profitable to buy than to rent.

Comprehensive analysis taking into account various factors

Initially, renting may seem more economical, but purchasing a property can create a very significant estate through capital accumulation and the appreciation of the property’s value.

However, many other factors must be considered, such as taxes, expenses associated with ownership, and the evolution of the real estate market.

For instance, if we do not plan to stay in a city for a long time, renting might be more advantageous, as buying involves paying a series of expenses, commissions, and initial taxes that will be difficult to recover if we plan to sell the property soon.

The Role of the Price Earnings Ratio (PER)

A valuable indicator that can help us is the PER.

The PER tells us how many times the rent we pay annually to rent is contained in the selling price of the property.

Let’s see an example:

If a property has a selling price of 300,000 euros and renting the same property would cost us 10,000 euros a year, the PER of this property is 30 years, since 300,000 euros divided by 10,000 euros results in 30.

If the PER is very high, it is advisable to rent, but if the PER is very low, it is advisable to buy. As a general rule, we can say that if the PER of a certain property exceeds 29 or 30 years, it is better to rent, but the lower it is from that number of years, the more profitable it will be to buy the property.

Consider the evolution of the property price

At Hipotecas Plus, we know that the price of housing can fluctuate greatly.

If the property value rises, buying can be very positive, but if there are prospects of a significant price drop, renting might be an option. Of course, everything is very relative, and forecasts may not come true.

Interest Rates

From 2008 to 2022, we have had very low interest rates, for many years at 0%, which has greatly benefited many mortgaged citizens, especially those with variable rate mortgages.

However, we are now facing interest rates above 4%, which has made mortgages more expensive. Analysts point out that to be as accurate as possible we must compare the money that goes to rent against the money we will pay in mortgage interest.

If the price of rent is much higher than the interest we pay on each monthly installment, it is better to buy.

It is always very important to bear in mind that what we pay as non-interest, that is, what is called the principal, or in other words the monthly payment that truly reduces the outstanding mortgage debt, can be considered as savings or money that becomes part of our assets.

In other words, with each monthly installment we pay to the bank, we are reducing the outstanding mortgage debt and we can consider that each month that property becomes a little bit more ours.

However, what we pay as rent can be considered as an expense, not as savings or an increase in assets, just as it happens with the part of the monthly mortgage payment that is allocated to the payment of interest.

That is why it is said that, if the rental price is excessively high compared to the interest that we would pay month by month on a mortgage for the same property, it is certainly worth buying.

Future Perspectives Regarding Housing: Renting or Buying

If our personal circumstances or our own lifestyle lead us to reside for a short time in a certain locality, such as 3 or 4 years, for example, we should think more about renting to avoid the expense derived from taxes that are difficult to recover in a future sale of the property.

Feelings Also Matter

The sentimental aspect should also be considered, although there are also people who only want to move in the most practical and rational ground possible.

But if a house is ours, even if the mortgage is present for many years, we can mold it, reform it, decorate it to our taste, knowing that it is our property.

A house that is ours will be filled with very pleasant family memories and experiences, and this is also an important factor to consider.

The ideal is to try to find a balance between practicality and feelings, without letting just one side bear the weight of the decision to buy or rent a property.

The Final Decision

We must understand that the final decision between buying a property or living in a rental is strictly personal and depends entirely on our personal circumstances, our goals, and our values.

The best approach is to perform a very detailed analysis of all the factors we consider most important.

We hope that all the aspects and variables that we have indicated in this new article from Hipotecas Plus will be of help or inspiration for you to make the best possible decision.