Our topic this week is property – specifically whether it makes more sense to rent or to buy your new home overseas. It’s common wisdom that when getting set up in a new country, it is usually better to find your feet by renting a property while you identify
(1) where you’d like to live long term,
(2) what your day-to-day living expenses will look like, and
(3) what type of property you’ll want to actually purchase for the longer term
However, is renting only until you are able to buy really the right approach for you? Many expats, particularly UK expats, tend to think the answer is always “YES”. This is usually a cultural thing – we love the feeling of ownership and it makes us feel safe. However, in investment theory something called the 5% rule exists. This rule is built on the founding principal that investing in financial markets secures capital growth faster than investing in real estate. Over the last 100 years, this has proven to be overwhelmingly true.
The rule is essentially the following: if your annual rent (i.e. your monthly rent times by 12) is 5% or lower than the value of the property, it makes more financial sense to continue renting and invest your available capital in financial instruments instead. And the inverse is also true: if your annual rent is over 5% of the property value, then you are better off purchasing the property.
The details as to why the 5% rule exists, and the calculations and logic behind this, are beyond the scope of today’s article. This essentially goes into investment theory, and I won’t bore you with this! It assumes that you have a sound financial plan in place, with an appropriate emergency fund in the bank and an investment portfolio that give you exposure to global equities markets. If you would like a free review of your own personal circumstances – including a review of whether your current investment strategy is up to scratch, please drop me a line and I’ll be delighted to help.
Rent or buy: in conclusion
For now, and for the purposes of setting yourself up for the long term in your new home, using the 5% rule is a sensible way to determine whether to rent or buy your property.
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