I am going to use an example where the property costs a lot. But you can divide down respectively.
I was looking at a penthouse apartment in London. Cost? £10m
You can also rent it long term, for £500k a year. Which is 20 years.
Now when you buy you have more expenses such as tax etc… lets just call all these inclusive for sake of discussion.
Would you buy it or rent it?
Smart people tend to say buy. But heres the thing… it is not freehold it is leasehold. The lease runs out in 20 years… I believe you have to pay to renew it. The lease holder doesn’t have to renew it, in which case you spent £10m on a property you no longer own?
The owner of a freehold can raise the rent but a leaseholder has legal rights too. The length of a lease is usually reflected in the price.
You can do a comparison, adding up all the costs of both options but there is a big intangible. The benefit of owning property is that you will gain from any increase in value. Many people consider that London property is due for a big re-adjustment which could make your £10m house worth £6m or £8m in a few years time.This would leave you with negative equity and unable to sell.
Back last century it was a lot easier. Inflation reduced the cost of your mortgage as a percentage of income, while the value of your house rise faster than inflation. A tenant just had to keep finding more rent each year with no capital appreciation at all.
Do you expect to be there in 20 years? Would a “lease to buy” option be available?
I wouldn’t take a 20y lease, but then, the house I happen to own is in a vacation location; as I’ve been bouncing around multiple countries for the last 24 years, buying the homes where I actually slept the most didn’t make sense. The first question isn’t so much “which of these two specific financial options makes sense?” as “for me, does it make sense to get a normal lease, a very long term lease, or to buy?”
This is Central London right? In 20 years, that flat will be worth £100m. Maybe £200m.
As a leaseholder you have a statutory right to have the lease extended or renewed - the freeholder can’t just decide not to renew. It can be a lengthy and expensive process, but you aren’t going to lose your flat.
I certainly don’t know the London market, but if I can rent a house/flat/condo for 1/20th of the price to buy, I’ll rent every time, especially if the landlord/owner is paying the real estate taxes and property insurance, and is responsible for repairs and replacement of appliances, roof, furnace, etc. I don’t know who these “smart people” are that would buy.
Remembering that all real estate markets are local:
So as an extremely generalized rule, the value of a property should be ten year’s gross rent, so in markets that’ll bear this “10-year Capitalization Rate” a £10m flat should rent for £1m a year. With the terms in the OP, I’d say there’s a bit of an oversupply of high-end rentals in the London area. Where I live we’ve had a chronic housing shortage, it’s not unusual to see 8-year Caps. Just adding a bedroom to an existing unit should bear a 5-year Cap or better.
Locally here, mortgage payments are usually 33% lower than rent for the same dwelling.
It depends if you have the money to buy it straight out or if this is the place that you want to spend the rest of your living, you might want to retire in Cornwall instead of central London.
If you rent, you can just move - Once that house is yours, it ain’t moving unless you can sell it or rent it out yourself.
On the face of it, buying looks like a bad deal, since the present value of stream of payments over twenty years is simply the sum of the payments - there is no discounting at all.
The likely explanation is that the $10m capital payment buys you not merely 20 years occupation, but also a right to renew for a further period, on terms which are in some way regulated and which are more favourable than you would get if you were not the sitting tenant.
Whether that right is correctly valued in the $10m price depends, of course, on exactly what right of renewal you have, and on the value you attach to the political risk that the laws giving you that right may be amended at some point in the next 20 years. I think you’d need (and for that amount of money you’d be well advised to get) expert local advice on your rights, should you buy the tenancy before you could form any useful opinion as to whether $10m was a fair price.
If you put 15% down, and finance the remaining amount over 30 years at 5% interest. Your annual loan payment would be approx. £548k per year. As an owner you also get to capture the appreciation in the market value of the property over that time as well, if you believe it will appreciate.
As a renter, you get no benefits from the market appreciation, but you are protected from depreciation if that were to occur.
