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Weighing up the facts
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When you rent, you have little or no capital outlay, no service
charges, buildings insurance, repairs or maintenance or running costs
apart from utilities. You have to balance this against the possible
capital gain from buying.
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Buying property has its own version of money down the drain. Stamp
duty, estate agent’s fees, legal fees, service charges for flats,
insurance, interest paid on borrowings, all these are lost,
irrecoverable costs. And you pay none of these when you rent.
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Property is also illiquid, which means you may not be able to sell
when you want, at the price you want. It can take 18 months or more to
find a buyer, whatever the market.
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Rents have hardly budged
for the past decade, but property prices have
tripled or quadrupled. This means that it costs easily twice as much per
month to service a mortgage as it would to pay rent.
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When you buy, a huge lump of deposit is tied up in the house, compared
to the one month dilapidations deposit you put down when you rent.
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An average deposit for first-time buyers is now £33,000, compared to
maybe £1000 those same people would have to put down to rent a similar
place.
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Doing the sums
Let’s look at some British figures for buying or renting. Take a South
Kensington flat worth £500,000. “This property would rent out at,
typically, £500 a week or £2000 a month,” says James Rodea of Cluttons
Private Finance.
“But if you bought, putting down an 80 % deposit of £100,000, your
mortgage for the rest would cost £4,145 a month at an interest rate of
4.5%. In the first year, your acquisition costs would come to around
£40,000 and you could expect to pay another £20,000 a year for
insurance, repairs and service charges.
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“Your total interest over 10 years would come to £98,000, plus £200,000
over that time in maintenance costs. If the rent stayed the same, this
would come to £260,000, or £328,000 with a 3% annual increase.
The market illusion
Charlie Ellingworth, of PropertyVision, which finds suitable properties
for upmarket buyers, believes that often the money you appear to make in
a fast-rising property market is something of an illusion – especially
when you trade up, as most people do.
He says: “Suppose you bought a two-bedroom flat 10 years ago
for
£100,000. By now, its value has doubled, so you think you’re in heaven.
“However, you now want to buy a three-bedroom house as you have a
family. You discover prices here have doubled, too, so you have to pay
£300,000 for a house.
“To take another example: you bought a two-bedroom flat for £250,000 and
it’s now worth £500,000. Great – until you find that the house you want
has gone up by the same amount, and would cost £1 million.”
Renting long-term can make sense
Catherine Cockroft, director of lettings at London agents Aylesford,
says that many of her clients now continue to rent long-term, even when
they originally intended to buy.
She says: “Rents have not gone up significantly for years, and can
represent a real bargain for people who do not want to tie up large
amounts of capital. Many of our tenants tell us they can make far more
money by investing their capital in money markets than by putting it
down as a deposit on property.”
As a case in point, lettings director Liz Thompson of Marsh and Parsons,
Notting Hill, cites one client, a senior Barclays Bank executive, who
sold his W11 house for £4 million, and is now renting at £1800 a week in
the same locality.
Buying or renting in the country
In the country market, Jane Russam of Lane Fox also has many long-term
renters. “Our clients are mainly people escaping from London to the
North Oxford area, and their intention originally was to rent until they
found their wonderful, perfect, country house,” she says.
“But that perfect house never materialises or if it does, they can’t
afford it. So they tell themselves that although they can’t afford to
buy this beautiful house, or one like it, they can afford to rent it.”
A big manor house in Banbury, where Jane works, rents out at £2 -£3000 a
month, but would cost around £1.5 million to buy. “Many of our clients
decide to spend the money on their children’s education instead,” she
adds.
Buying: the advantages
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A rented home is never yours, nor can you ever personalise it as much.
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There is no security of tenure. The landlord can decide to sell at any
time, and you have to move out.
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The owner may want the property back to live in.
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Although it is difficult to make money when trading up, you can make a
fantastic killing by trading down.
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