Literally. We live in a 50+ year old rented house in Manila. It has undergone renovations several times, but it is still essentially a 50+ year old house. And it has a leaking roof. In the past few months, the leaks have gotten really outrageous, and in the heavy downpours some two weeks ago, we were running around our living room saving paintings, furniture and electronics from some 30+ gallons of water that came pouring into the area. That was absolutely the last straw. A strongly worded letter sent to our very nice landlord, finally resulted in a decision to change the entire roof; and work started yesterday, in the middle of the rainy season! So these aren’t halogen (I know, an environmental nightmare) lights with special halo effects, what you see here is the sunlight behind the halogen bulbs… you can literally SEE THE SKY from our couch! Egads. And the ruckus associated with removing decades old galvanized iron sheets and drilling new roofing materials into place is unbelievable, but at least we won’t have any more leaks…
I have been asked several times by friends, family and even readers over the years what I thought about renting vs. owning a home. And I have to say, we have always RENTED our apartment or home in Manila for the past 12 years or so… and it was the wisest move we have ever made housing wise, even with the current unfettered view of the clouds from our dining table. Here is how I figure it, and I understand many folks may think the logic stinks, but it doesn’t… So if you are thinking of buying vs renting, do your own analysis and see how it comes out:
Assume the following for the “Forbes Park Example A”. Here one purchases a home in one of the toniest Makati villages in 1995, at about the height of the real estate market, when the peso to dollar exchange rate was roughly PHP25 to 1. Let’s say, for the sake of this example, you bought for cash a 1,000 square meter lot with a 15+ year home that you could move into with minor repairs at say PHP65 million or roughly USD2.6 million.
Value of that same home today, assuming you maintained it reasonably, would be roughly PHP50 million or roughly USD 1.0 million. Your average annual return in peso terms would be approximately minus 2% (-2.0%) per annum. In dollar terms, it would be approximately minus 7% (-7.0%) per annum. Yup, read that again. But, ah you say, Marketman forgot to factor in saved rental income, so let’s say you got a utility of roughly PHP100,000 per month for 13 years, then you saved roughly 16,000,000 in rent, but spent maybe PHP5,000,000 in property taxes, maintenance, insurance, etc., for a net benefit of say PHP11,000,000. But even if you factor this in to the purchase price and the current price, you still would have made NOTHING on this investment in peso terms in 13 years. And in dollar terms it remains a negative return.
Now, you say, Marketman picked the height of the market in 1995, when we happened to move home to the Philippines, what if you changed the starting point to say 1998, when real estate prices plunged and one could get a similar house as the one described above for say PHP50 million or roughly USD1 million at the exchange rates then. As of today, shortcutting the math, your house would be worth roughly the same, if not gain say 1% per year at the maximum, and you would have saved PHP11 million in rental and other net expenses. This is still a FAR CRY from the average return over a decade of a mutual fund in international blue chip stocks at say 12-13%.
So what if you rented instead of buying, and invested your money wisely instead? To continue the same example as above, let’s say for the sake of argument that we had PHP65 million in cash in 1995, converted it into dollars and got USD2.6 million. Invested this in a mutual fund or treasury fund and earned a conservative 8% (12% is more usual over a long period) or roughly USD 208,000 per year. Out of that annual interest, spend roughly USD50,000 a year to rent a fabulous Forbes Park house and make sure it is so well maintained that you are more than happy to live there, even if the roof leaks occasionally. You would then grow your money by say another 150,000 per year, and in 2008, interest compounded, you would have at least $5.2 million in the bank in cash or near cash financial instruments. You wouldn’t own the house you were living in, but now you could literally buy FIVE of those houses up and down the same street with your USD5.2 million, see the difference? It’s whopping huge. Particularly for anyone from abroad sucked up into the vortex of buying a local home or apartment as a retirement nest egg…
Now, you say, maybe you aren’t willing to dabble in foreign exchange, and did the analysis in peso terms only. If you had PHP65 million in 1995, you could easily have invested it in safe treasury bills and other corporate bonds of blue chip companies (no high flying stocks even) and yielded some 10% or 6.5 million in annual interest. You could spend PHP2 million of that renting your home and saving the remaining 4.5 million, and today, with compound interest, you would have roughly PHP157 million, or enough to buy THREE houses. Don’t believe me? Do the math.
And I showed you the highest end example to show you that buying “prime property” isn’t always the brilliant investment people seem to believe it is. And even more so that you should do the numbers when you have to borrow some of the money to pay for a property purchase, that makes returns sink even faster. You can do this all across the spectrum and only when the numbers make sense would I consider buying over renting. Really? Well, not really. If you CANNOT stand the thought of renting and want to have a house exactly to your specifications, and nothing else will do, then throw your money at it and look the other way. It isn’t a financial decision, it is an emotional one. Also, if you want a lot or location that you do not think will be on the market in a few years, you may have to buy it now. If the basic price of land is still very low; for example the returns would change for the better if you bought Forbes Park land for PHP10 a square meter (the prices in the 1950’s) and sold it at PHP50,000 a square meter today (in peso terms, that works out to roughly 13-15% annual compound return after paying proper capital gains taxes, but in dollar terms, just 6-7% annual compound return). However, inflation has been really tame for 15+ years with the exceptions of periods of financial crises. If inflation were to run rampant, then folks owning houses could smile a little bit more. But in a rational world, in the Philippine real estate market, in the past 10-15 years, the ones who rented would, for the most part, have beat out the folks who bought fancy homes and apartments. But don’t tell everyone you know, or you won’t find a home to rent. And you must be incredibly DISCLIPLINED to invest your savings from renting rather than buying instead of going out and spending it from year to year. It’s best if 90+% of the population keep believing it’s a great thing to buy houses and apartments and then rent out their properties so that folks like us can take advantage of the weird market dynamics that allows us to occasionally see the sunlight through our ceiling, but have a fatter savings account and more funds for lechon experiments… :)