Why Buy Even in a Flat Market? – It Halves Your Rent
Prices are pretty flat in Abu Dhabi at the moment, you aren’t likely to get much capital appreciation in 2016. So why buy if your investment isn’t going to go up in value?
I’m going to use an example of two units we currently have i) A Tala Tower (Reem Island) two bed apartment and ii) a three bed on Reef – both for sale at 2m, currently rented at 150K per year. I will assume a buyer with a 25% deposit (500k) with 1.5m financed at 4% over 25 years. If you would like this article for any other unit please let me know and I’ll send you the break-down.
Lower “Rent” – Your rent on this unit is 150k per year if you are a tenant. If you buy it your mortgage repayments would be 95K per year. A saving of 55K per year or 37%, the difference between being a tenant and an owner. It gets better ….
Paying Down Equity – When you rent your money goes straight into your landlord’s pocket and you get to stay in his property for another year. If you own your property then in the first year 35K of your 95K payment to the bank for your mortgage goes to paying off the principal of your loan (the other 60k is interest payments). This is money essentially going into your pocket as it is taken off the amount you owe, so if you sell the unit at what you bought for you get to keep this amount.
So in lower “rent” you save 55K and paying down equity you add 35K. Factor in about 15K for service charges and your total saving per year is 75K or 50% of your total rent. If you buy you halve your rent.
If you doubt my figures go tohttp://www.mortgagecalculator.org and use the yearly amortization schedule.
If You Are An Investor – So buying at 2m for 150k per year is an uninspiring 7.5% return, and if you factor in 15K service fees it becomes 6.75% net. But you are using only 25% cash (500K) to get this return and the other 75% you are borrowing at 4%. For every dirham you borrow at 4% you get a return of 6.5%, a difference of 2.5% on money that isn’t even yours. For more on leveraged rental returns see my Article in the National here. Your return on this investment is actually 8% net on your 500k investment.
Inflation Proof Investment – Inflation in the UAE is anywhere between 3 and 4 percent per year and the best saving account you can get offers well below 3 percent. This means you lose money in actual terms putting money in the bank. Returns on even poor investment grade property in Abu Dhabi are 6% so better to park your money in something that offers genuine returns.
If you want to talk to me about any of this please email me at email@example.com
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