Renting vs Buying #
Which is the better option for you?
Any large asset acquisition is a big decision, the cost being a major consideration, of course. But the time and energy to manage a property is also in important factor. Most people in the US and UK buy and sell a home every five to seven years. In Germany, most owners will own a property long-term. Second homes in Mallorca, regardless of expat nationality, are usually kept longer because of the tax structure, the ability to find friends and family who love visiting the Island and will pay you to stay in your place plus the time you need to sell a property. Here are a few advantages and disadvantages in buying and renting to help you see which is the better decision for you.
First: Do you have a math problem? When buying a home, you can choose to pay all cash or to take out a mortgage. These are not that difficult to find but you may have to wait up to three months to have the property transferred to your name. You’ll also need at least 40% of the purchase price in cash, have excellent credit and proof of employment for a lending institution. Here are the pros and cons:
Advantages of Buying #
If property is in good condition, cost of ownership can be less than renting.
As a buyer you have control of the property and can realise increases in equity and capital gains on the property. Current market areas in Mallorca see double-digit increases in sales prices due to high demand.
You will create a savings account, of sorts, because you will be investing in your home as an asset, especially when you are paying a large down payment or purchasing all cash.
Buyers have certain tax advantages. You’ll need to discuss this with your accountant and attorney for specifics to your case, especially if you are a tax resident of another country. Just be aware, unless you hold residency in Spain at the time of buying, you will not be able to qualify for a lower capital gain tax with the Spanish authorities.
A big advantage is to have personal freedom to decorate, remodel and make improvements as needed and wanted. As a tenant you may think you can live with a broken light near the pool. However, that out-of-date “Boletín eléctrico” becomes more than a nuisance when you want to run that air conditioner in late July. With temperatures hovering at 39-40 at night, you may have to pay for upgrades yourself but not have any way to be compensated for this cost by your landlord. This happened to us in Andratx when an agent misrepresented a house we contracted in a rent to own agreement. Beware of bad agents!
Other Considerations #
Buyers are responsible for mortgage payments, taxes, insurance, maintenance, repairs and any dues to apartment blocks or owners' associations.
You have less flexibility to move or travel the world. The reality is that you may take a vacation or two but you will feel obligated to use your home most years, even if you rent it out part-time.
The market and prices fluctuate which means you might have to be prepared to hold your home for a long while to wait out market dips.
Currency fluctuations make holding a property more expensive in certain years, especially with the current depression on British pound. The Euro exchange with currencies rarely has a counter pressure these days. The pound may be low for years to come which means that the Euro may not be at par or below but it will certainly not offer currency exchange advantages to owning property outside of the UK.
You are in control of your asset and the keys. While Spain has fairly good tenant laws, the landlord still has access to your place. If you want complete privacy, buying is the only option.
Advantages of Renting #
Two factors to be considered in your calculations: How much is the market appreciating and how long will you hold the property? You’ll need to rent the property for a minimum of three years to recover transfer and acquisition costs.
Renting in Spain affords you a few protections if you maintain your payment to the owner and keep the utility payments current.
Affordability must be taken into consideration when deciding to buy or rent, despite the plans of a person to stay in a home for a long time. Many financial experts suggest that buyers keep their monthly residential payments at 33% or below their gross monthly income. If buying would mean over stretching your means, rent.
Mortgages in Mallorca #
They are essentially unregulated by the Spanish government. Anyone can offer you a mortgage. This is good and bad. Good because you have access to money for a fee and bad because a property may have multiple liens and you may not know until after a lienholder contacts you to collect on the debt. This happens more often than you might think. All the more reason to do your homework. Have the property owner establish a paper trail of payments during ownership. They may not want to but the government requires everyone to do this now in order to collect taxes and to dampen money laundering practices. When an owner or agent balks at the request for information, know you will pay for lack of knowledge one way or the other.
Bank interest rates in Spain are appealing for buyers. If the home is your primary residence, the rates range from 1.7 to 2.7%. While most banks offer mortgage lending services, if you are not a European national, you may have a hard time establishing your relationship with a bank. The “KYC” (Know Your Client) regulations require banks to perform due diligence to know where your money originated, your credit history and current job status and how you will repay the loan in a clear paper trail.
By Memphis Holland
24 September, 2018