After receiving a few enquiries about whether it’s better to rent or buy a property in Valencia I thought it time to put together a post comparing the two options in terms of costs and what your “get out position” is at the end. Obviously there are other considerations apart from monetary costs but we will focus here on the costs and then look at those other considerations at the end.
We are going to go with a similar property in both cases and look at various time horizons. For the numbers we are going to use an example from last week where the client took on a mortgage at a fixed rate over 20 years.
You come to Spain and you rent initially but are not sure whether to continue renting or buy. This happens a lot for people usually once they realise that Spain is a great place to live and is also the scenario that many people find themselves in once they have settled into Spanish life. Perhaps your initial rental isn’t somewhere you would choose to live permanently and you have found somewhere more suitable for your new remote working lifestyle.
You go into the property portals and look at both rentals and sales. With sales you may find that there are a lot of places that look ok but could be great if they had your seal on them. With rentals you look at a load of ex airbnb places where the photos might look great but you know the modernisation was done cheaply and little by little the property will begin to show wear and tear.
You decide, in a sliding doors moment, to go for both scenarios. The place you look to purchase is 162000 Euros and you get a mortgage of 126000 Euros over 20 years at an initial 2.25% fixed rate. However with the offer from the bank including a set of discounts for using their products you manage to finish up with a 1.5% interest rate ongoing, (House insurance through bank, have a credit and debit card from them and bills going through your account). This gives you a monthly payment of 502 Euros although for the purposes of the numbers we will call it 500. Of that 500, initially you are paying roughly 200 Euros in interest each month and 300 capital.
Because of the costs of purchase of property in Spain 15% on top of the price. Your total outgoing on purchase is 186000 Euros (162K + 15%). The bank has lent you 126k so your initial outgoings are around 60k. That’s a considerable downpayment.
The Rental Option
In the other sliding doors scenario you decide to go for a rental. Similar properties in size to what you have bought but in a slightly better condition currently are in the 800-1000 Euros range. You decide to go for a mid range property. You get a furnished place so you are asked for two months deposit, a month in advance and an agency fee of one month too. Your initial upfront costs therefore are 3600 Euros, considerably less than in the purchase option.
And remember your rental will go up every year if you remain in the same property by the inflation rate. If you decide to change where you are living then you are likely to have to pay more in the future too, but to be fair to the long term rental option we will assume prices don’t go up for twenty years and you continue to pay 900 Euros every month (As if that will happen. Just over 20 years ago on moving to Valencia I was paying the peseta equivalent of 360 Euros per month an equivalent house in that area now rents for 800-900 Euros).
You either pay your rent or your mortgage. In the mortgage scenario you send 500 Euros each month to your bank and they reduce the amount you owe every month by 300 Euros. The amount of capital paid off every month will rise until in the last month of your mortgage, in the dim and distant future, almost 100% of the 500 Euros is capital. This means of course that at the end of the first year you have paid off 3600 Euros of your mortgage making the outstanding amount 122400 Euros. Remember though you are also paying less than you would for your rental and, as a responsible person you decide to put that extra 400 Euros into savings so by the end of the year you have 4800 Euros in your savings account. (We will assume it doesn’t pay you any interest although you might be a genius and put it into an interest bearing savings account or even Bitcoin or other investments) After one year therefore your total outgoings are 66000 Euros, 60k upfront plus 6000, but you have started saving again and have a nest egg of 4800 Euros.
Meanwhile your rental costs have been 900 Euros per month paying to the landlord. They now have 10800 Euros which was yours at the start of the year. Your 60k nest egg is still there though as you are paying the rent and your day to day costs from your earnings. However you cannot put away an extra 400 per month like in the buying scenario.
Let’s just run the numbers again. Your mortgage is now 118800 Euros and your savings are 9600 Euros. Your total investment at this point is 72000 Euros. With the rental you are down another 10800 Euros, now you have shelled out 21600 Euros.
You now owe the bank 115200 Euros but you now have 14400 Euros in a savings account. Your total investment is 78000 Euros. Having rented your “investment” is now 32400 Euros over three years.
We skip a couple of years because this is where the magic begins to happen from a financial perspective. You now owe the bank 104400 Euros and you have spent 34800 Euros but you have 28800 Euros in a savings account. Meanwhile in the rental scenario you have spent 64800 Euros.
However you begin to notice something, of the 34800 Euros in mortgage payments 21600 Euros has actually increased your net worth because the amount you owe the bank is lower, the rest is interest. Effectively you have “saved” 50400 Euros in total (reduced mortgage amount plus savings). Give it another year and your initial cost difference between the purchasing cost and the rental cost is gone.
You start looking online and you find something has happened to house prices in the time since you bought. Equally if you rented you cannot find anything even close to the price you are currently paying so you are forced to stay in the place where your landlord is still charging you 900 Euros.
What Has Happened?
(And this is a potential scenario which is easily foreseeable)
We are now in 2027 and have just been through an age where governments were printing money like there was no tomorrow, (that pandemic thing we went through in the early 2020s you remember), and having learnt their lesson from the slow recovery after the financial crisis of 2008 when governments around the world cut costs and implemented austerity rather than putting money into stimulating the economy like they did from 2020 onwards, asset prices as a group have risen. The property market has risen of course because everyone wanted to pay a fixed interest rate of 1.5% rather than a rental cost that was 80% higher thus increasing demand for purchasing property.
You see that conservatively house prices have risen by 4% per year. The place where you live is now valued at around 210000 Euros, (Roughly 30% higher at 4% per year with compound growth after 7 years) You “only” owe 104400 Euros meaning you are sitting on over 100k of equity in your property (And remember you have almost 30k in your savings account too.
The comparison between the purchase and rental options starts to become frankly unfair after year seven but just to emphasize the difference in year ten. You have now paid off around 44,000 Euros of the initial capital (Remember what we said about that 300 per month slowly increasing over time and the interest decreasing? You are now at around 360/140 split on that.) You also have 48000 Euros in a savings account. With the rental option you have now passed the 100k mark paid to the landlord, 108k to be exact and the property is a bit of a mess because frankly the landlord just sees you as a cash cow and doesn’t invest in the property themselves because it eats into your payment each month (NB This WILL happen)
You pay off the final part of your mortgage and suddenly you don’t have any more payments to make. You still save the frankly derisory amount for 2040 of 400 Euros per month meaning you have a nest egg of 96000 because you didn’t really invest it but you now have an asset which even though there was the depression of 2030 onwards (Economic shocks happen every ten years or so) is worth a little bit more than it was in 2030, some 250k. You are 350k up having paid off 126k (You actually paid off 162k when you add in the interest payments, 240 payments x 500 Euros)
In the rental scenario… let’s not go there shall we as 240×900=216,000 Euros. 216000 Euros you haven’t got but your landlord has, while continuing to not be able to save your small amount of 400 Euros per month.
There Are Other Considerations
You Are Going To Buy Anyway
At the end of three, five, or even ten years you decide to buy anyway. Effectively you have shelled out all of the rental money to pay off somebody else’s debt. And that 60k nest egg you have so meticulously kept for the years while you have been renting you use anyway to buy your own place but now prices are higher potentially and your 60k deposit might only get you an interior two bedroomed apartment instead of a three bedroom place with a terrace perhaps.
Also a few years down the line mortgage availability may change. Banks may only offer 70% or even 60% or less meaning your 60k nest egg isn’t as useful in buying the type of property you want. Equally as inflation rises and the economy recovers, interest rates may go up and that effective 1.5% interest rate may no longer be available. When I signed for my mortgage around 15 years ago my interest rate was around 5%. A friend of mine remembers his mortgage rate being 18% in the last century!
As an owner you will have them, as a tenant no, but don’t expect any modernisation or upkeep of the property as a tenant, you don’t feel invested into a property that is not yours so you probably don’t keep it as well as maybe you would have if it were your own.
As an owner you will need to contribute to the community costs and some of them may be higher like when the community decides to install or upgrade a lift for example if your building’s current lift is older. I know it sounds hollow to say it when you get an unexpected cost when the boiler conks out for example but
That “At Home” Feeling
I lived in a rental property in Northern Spain for six years. It was my home, but the owner let it be known it was really theirs regularly when we asked for repairs and they never happened, always got put off or were done “on the cheap”. Bit by bit the normal wear and tear to the property made it worse.
On the other hand now I live in my own home, (I say my own but the bank still own a large part of it). However, things get done, repaired and improved upon making sure that the property retains or improves its value.
Property can always drop in value so the location, type of property and demand become a factor. However, if you are doubting the long term value of having a property then just look at the average house price graph in your country before coming to a conclusion that your feeling is correct. There has always been a long term uptrend in property prices despite shocks like the post 2008 financial crisis contraction.
Let’s be honest here, as inflation goes up then house prices will too, and even in times of low inflation like the last seven to eight years prices have moved upwards from their base in the years directly following 2008, quite strongly too. However, even if prices do drop they tend to rebound in the long term as governments try to stimulate the construction and housing part of the economy first as a response to economic shocks.
Your “Get Out Position”
Obviously your get out position in a rental is simple, you give a month’s notice and leave, however remember that the landlord can also give you an ultimatum to get out at any time! This is another issue not allowing you to feel comfortable in a rental property because the landlord can have a change of mind, a family circumstance changing or just dislike you after a time and tells you to get out.
With your purchased property you have two get out options. Firstly, if you need to move elsewhere because of work or anything related then you can rent it and get somebody else to pay your mortgage plus usually an extra amount to cover any costs and maybe allow you to save too. The second option is always to sell the property and at that point you may find you have a windfall because you pay off the remaining part of your mortgage and are left with the equity in the property (Just remember you may have a capital gain if not reinvested within two years). The downside is if you need to sell quickly and move quickly where you may be forced to sell at a lower price.
It’s unlikely that you would be in negative equity after the first five years unless you took on a 100% mortgage at the highest point in the market. By reducing the capital amount pending every month your chances of getting into negative equity are much less as time goes by so your risk is less over time. On the balance of probabilities you would be in a much much better position having bought rather than renting.
If you are definitely going to buy property in Valencia then the conclusion is do it as soon as you can, as soon as you have decided the area that you want to be in. As long as you are able to pay the downpayment required and have that nest egg available then it seems to be a logical decision to buy rather than rent long term, inflation eats into your deposit money too. Short term rentals to get you used to the city and the area and living in Valencia are a logical step but use the time in your rental to find out where you want to be long term. Also try to make sure your rental is easily affordable and save as much as you can to increase your nest egg as much as you can.
If You Liked This…
Then read more from our website below including our Golden Visa Property of the Week and previous blog posts.
Golden Visa Property of the Week
Villa with Great Indoor and Outdoor Living Areas
Well constructed villa, in a consolidated urbanization of Ribarroja del Turia, very close to the town of La Eliana. Lovely garden, with automatic irrigation, a swimming pool with Jacuzzi and outside toilet.
The entrance hall leads to the dining room that stands out for its abundant natural light and double-height ceiling. There is a large kitchen with office and separate laundry room. Both the living room and the kitchen give access to the wonderful covered terrace with barbecue and outdoor kitchen. This looks as comfortable as the inside living area, and you don’t often see the terrace being such a focal point for the house activity as this is.
On this same floor there are 3 double bedrooms and 2 complete bathrooms (master suite with dressing room and complete bathroom with bathtub, walk-in shower and double sink).
A comfortable staircase leads to the upstairs space, which has most recently been used as a home office, but which has the possibility of being converted into one more bedroom and a bathroom if desired. There is a terrace on this level too.
In the basement we have an excellent leisure area and a garage with an automatic door, with capacity for two cars and a storage area.
Some of the features of the property include, large tilt-and-turn security windows, double insulating glass, blinds and mosquito nets. There is underfloor heating and an air conditioning system.
Of course La Eliana is convenient for various international schools, and the city of Valencia itself, only 15 minutes away.