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Real Estate: Should you buy or should you rent in the Algarve?

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Real Estate: Should you buy or should you rent in the Algarve?

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Written by  Staff Writer
Wednesday, 16 August 2017 00:08

In view of the current economic scenario, more and more people are asking about the virtue of renting a home versus buying a home. The same scenario may apply if you are relocating to a new area. Does this sound like you? If yes, then this article is for you!

  • What are the merits and disadvantages of each?
  • Which one is cheaper?
  • Which one is the best option?

The answer to all the questions above, are in fact based on the personal situation of each person, their wishes, the available resources, their tastes, as well as many more personal reasons.

Many people need to “own” their home. Others just want to rent, for no other reasons than they do not want to be burdened with maintenance requirements. Again, this is one area where the reasons are as vast as the diversity of mankind. But, if we look at it only from a financial perspective, even here it is difficult to quantify all the merits and demerits of buying versus renting.

For example:

In both cases, renting versus buying, there are various costs, which will need to be accounted for. When you rent, normally all direct costs are included as a one-sum payment on a monthly basis, but the ultimate responsibility belongs to the landlord. The landlord is responsible for all maintenance costs, rates and taxes, insurance, etc … while the tenant is only responsible for the rent and utility services costs. But when you buy, you are also buying a basket of responsibilities and added costs.

As a buyer, you need to make provision for conveyance costs, inspections, title deed registration fees, and taxes, amongst many other costs, some of them unforeseen. And if you are buying the property with a housing loan, then there are all the negotiations with a bank as well as the responsibility to serve a long-term liability.

In the upfront analysis of the cost of rentals versus purchasing, that the rental option wins hands down. After all you will need to have less funds available to rent than to buy. In the case that you do have the necessary funds, as well as the time to go through all the steps needed to buy a home, you may still opt to rent.

Why?

Because it may be more prudent for you to invest the money saved between the difference between the cost of upfront ownership and the cost of a rental. If, the reason that you are looking for a new home is based on relocation, it does definitely benefit you to rent for a while before you venture into purchasing a new home.

In the current job market, people are relocating from one area to another in on a more regular basis.

It is not unusual for someone to buy a home in a specific location, and for that person to be transferred within 2 to 3 years, especially if the person is still in the beginning or at the end phases of his or her career.

Another reason why many people sell their homes within the first 5 years, is the birth of children, or the fact that their children have left home.

The reasons for the above situation are many, but one thing is for sure, if you bought your property and are selling your financed home in the first 5 years, means that the chances that you will recover your original investment and make a profit are nominal. The norm is that you will either break-even, or you may even loose money in the sale transaction, because you have been paying mainly the interest portion of your home and not the capital debt.

For example, you took a bank loan for 100 000€ over 30 years, at the end of your first year, you may not have reduced the amount owned to the bank by no more than 1500€, although you would have paid the bank anything between 6000€ and 7000€ in loan repayments, because interest comprises the biggest component of your repayments.

Linked to above example, if you swap your current home that you have had for 20 years for a new one, you may make some capital gains and recover not only your initial investment, but also show a nice profit.

Now, if you had rented for the same period of time, you will show no financial gains.

Another serious consideration is the fact, that in general, if you have an option to buy or rent, the amount levied, as rent will generally be lower than what it would be as a bond repayment had you recurred to a bank loan. That difference, even if its nominal, can be saved for other future needs or invested.

There is no doubt that there are many benefits and motivators in favor of renting versus buying, especially if it is your first home, or if you are buying due to relocation. But there are also benefits if you buy your own home, especially if you know that there is a very good chance that you will be living in the area for more than 5 years.

 

There are many factors that you and your family will have to consider.

Let me share my own experience. Coming from South Africa and relocating to Portugal, my first reaction was to purchase a property, but exchange rates fluctuation motivated me, my husband and our 2 dogs to live with my mother for about a year inside the historical center, get to know the town, and compare the offerings on the market in the various areas.

I have always loved the Luz area, and being English speaking, that was a natural choice as a preferred area, but before we bought, we rented a property in the center of Luz, it was OK for the first week, but Luz has many, many loose dogs prowling the streets, and it became a mission to take our dogs for a walk. We soon realized that we had made a mistake in choosing Luz.

Thereafter, we looked for another place were it would be OK to have our dogs and were we didn’t have to worry about their safety. So from Luz, we chose to go to Odiaxere, to the agriculture holdings. Again, we though we had found the perfect place. So much so, that we started purchasing proceedings, only to find out that the property did not have the necessary habitation licenses amongst other things.

Now, had we proceeded and bough the last property outright, we would now be facing a major financial loss, but because we rented with an open option to buy, we could finish our original lease period and move without having incurred more costs.

Other benefit of renting, is that it gives you an opportunity to see if you can live in the neighborhood, if you like the neighbors, that there are no problem neighbors, etc.

I am not against buying, but I strongly recommend that if you are new in the area, check it out first. Even if you have been living there for a while, it is always a good idea to rent first before you commit yourself to a new purchase. Alternatively, you can rent with an option to buy. Have exit clauses in your contract, in case the property fails to meet the required standards.

In the Algarve you can rent a property for 6-months or longer. My advice is rent for at least a year. That will give you an opportunity to make an informed property purchase if and when you do decide to buy. It will surely save you time, money and frustration! It did to us.

 

 

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