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Buy or Rent?
Buying property or apartments for rent in Dubai is one of the most important decisions you may ever have to make in your life. The average person owns up to three homes during their entire lifetime, and owning a house requires careful consideration of several factors.
Should you buy or rent then?
Before anything else, you will need to take a good look at your finances. If you are considering buying, many people opt for financing by taking out mortgages rather than purchasing a home upfront. Whether or not you have the cash, there are benefits and disadvantages to cash payments vs. mortgages. If you have the money, then an obvious benefit would be no interest rates or mortgage fees. Also, sellers are more naturally inclined to sell to cash payers because they don't have to be concerned about loans or bank approvals. If you already have enough money, you may come to realize that sellers may close the deal faster and even offer you significant discounts.
Although it may not seem like it, going for a mortgage has benefits as well. In an ideal world, taking out a mortgage and paying it back promptly every month will not restrict your financial resources. You would be able to account for any abrupt finances that would have been otherwise difficult to deal with had you purchased the property in cash.
Whether buying a house cash or through a mortgage, there are several costs and considerations to keep in mind.
Here are a few advantages and disadvantages.
Advantages of Buying:
Peace of mind and the joys of ownership: You will be the actual owner of the property, which means that you will no longer have to deal with landlords or comply with their demands. Let that sink in a little. How does it feel to be the proud owner of a property? It feels good, doesn't it? If you rent, sometimes you may sign a rental contract so exhaustive it would frustrate anyone reading it! The landlord may impose a plethora of policies, articles, and guidelines in their contract stating their rights and the tenant's obligations.
What about your rights? Well, you might get a minuscule article in the contract that says, "You have the right to live peacefully in the premises, use the utilities provided, and avoid making noise." If you decide to rent out a property you purchased, then you ARE the actual landlord! In that case, remember to be professional and fair to your tenant. For some people, owning a property can provide a great sense of relief, pride, and happiness. After all, you live in your own house, especially if you love the place and want to live in it for a long time. Some developers have introduced a "rent-to-own" payment scheme in which the buyer can bypass the 25% down payment requirement. This is ideal for buyers that want to go down the financing route with mortgages but can't fork out down payments.
Asset "ish" and tangible: Some people oppose the idea that buying a home is considered an "asset." The reason is that a home takes money out of your pocket- much like what the author Richard Kiyosaki advocates for in his book "Rich Dad, Poor Dad," so let's not get into that debate. Others consider buying property as a long-term "asset." However, buying a home and then leasing it to tenants will render your property a tangible, income-generating asset. Paying for rent takes money out of your pocket, so that's a liability. Let's keep it as simple as Robert's understanding.
A sense of stability and belonging: When you own a home, you may finally feel "at home." Although this may sound like an intangible advantage, it somehow offers solace to people. Some people may view the property as a family heirloom that can be inherited and passed on to future generations. This adds sentimental value to the house.
Parking availability (including guest parking for certain properties): Certain properties offer the convenience of "owning" your parking spot, depending on the type. This can make your parking spot always available to you and may even provide more privacy and security than, say, parking your car outside an apartment complex where it can get hijacked or stolen. This is especially true for villas, townhouses (if you install your own security), and apartment buildings with security guards and built-in parking lots and CCTV cameras.
Equity accumulation: According to market trends, supply and demand, and inflation, the resale value of your property may go up in time. This means that you may be able to sell your property and make a considerable profit. However, this is not ideal for someone who wants to keep the property for a long time and is not considering reselling it or using it to generate income.
Renovation-friendly: Since you own the property, you can upgrade, modify, renovate, demolish, or do whatever you want with your property according to your style and taste. If you rent, most landlords don't allow you to make modifications to their property. Even if you do, most of them would require you to give the property back to them in its original condition or risk losing the security deposit and incur additional clearance charges.
Disadvantages of Buying:
High upfront costs (including down payments, monthly mortgages, and DLD fees): Even if you plan on getting financing, most properties require hefty down payments. We're talking about tens (or even hundreds) of thousands of Dirhams to start your ownership journey. If you have all the amount, then that may be equivalent to putting all (or most) of your eggs in one basket. Downpayments in Dubai are at least 20% for expats and can go all the way up to 40% of the property's purchase price. Rental security deposits are much, much cheaper such as 5% of the annual rent. Mortgage payments are usually more expensive than rental payments, which may take a toll on your financial resources. You will also have the headache of dealing with interest rates if you have a mortgage. If you default on a loan, then you may be in trouble. You are also required to pay Dubai Land Department (DLD) fees which are 4% of the property value, and fees for paperwork such as admin fees, agent's fees (which can be hefty such as 2%), NOC charges, and others.
More paperwork and possible stress: The name says it all. You may need to deal with more complicated paperwork such as the title deed, sale agreement, tax (if outside the UAE), completion certificate, insurance, NOC, POA, mortgage, building plans, and zoning regulations. It would be a good idea to hire a lawyer or a closing agent to close a property purchase to avoid any legal loopholes or surprises found in the MOU or sales agreement. Although the DLD introduced standard, unified contracts to regulate the relationship between buyers, sellers, and brokers, there may still be things to account for down the road. Your financial responsibilities will also be more significant than renting a property, which exposes you to a world of stress. If you live in a country that charges annual taxes for homeownership, you will have to worry about that, too. However, you may also have tax benefits, but this is outside the scope of this article as it focuses on the UAE. There is no taxation on properties in Dubai.
You may also have to worry about foreclosures if you default on your mortgage. Imagine the traumatic experience of having your property taken away from you through foreclosure if you couldn't pay your loan, especially if you have already covered a portion of your mortgage after a considerable number of years. Unfortunately, banks won't care whether you've lost your job or have health problems that have caused you to fall behind on paying your loan payments. While failing to pay rent promptly can also subject you to fines and eviction, the prospect of losing your own home can have a more gut-wrenching negative experience if your home is financed. Keep in mind that banks may require security checks or collateral from you, and they will have no qualms cashing these security checks if you default on your payments.
Unpleasant surprises and repairs: The property may have problems that are not apparent during your first visit (especially if it's not new), such as hidden structural or foundation problems, expensive leaks and plumbing disasters, electrical problems (bad wiring), infestations, mold, and the list goes on. Home inspections are crucial and you can save yourself a lot of money (and avoid a bad investment) if you hire a professional surveyor to inspect the premises.
Although this practice is not very common in the UAE, it is strongly recommended. As a civil engineer, I once prepared a Property Condition Report (PCR), the work product resulting from completing a Property Condition Assessment (PCA). This PCR is a written report prepared according to ASTM's recommendations and guidelines and was prepared after conducting a walk-through survey. It outlines observations and opinions related to the subject property's condition to remedy any material physical deficiencies observed, opines on the subject property's overall physical condition, and provides a description of various components and systems. PCRs also outline probable costs to remedy physical deficiencies. If you are buying a home, you might be in for an ugly surprise if you are not careful. PCAs are necessary before any home purchase, but they will also add to the overall cost of buying a house. Remember that this is a home purchase rather than a rental contract.
Extra risk for off-plan properties: An off-plan property is still unfinished and under construction. The main benefit of purchasing an off-plan property is lower rates in comparison to market rates. Developers can sell at discounted rates such as 10% or even 20% because they want to ensure their properties are sold early while the development project is still under construction. However, you should consider the risks associated with an unfinished property, including incompletion or unexpected delays in delivery dates. Look for reputable developers, and always read your Sales and Purchase Agreement (SPA) carefully. It would be beneficial for you to pay the remainder upon receipt of the Building Completion Certificate (BCC). There is also the risk of finding out years later that the property's actual value is nowhere near the price you had paid for, especially if you had already covered a certain amount, such as 30% of the cost.
Maintenance costs: You will be responsible for fixing any major maintenance issues in your house, such as HVAC problems, leakages, and others. If you rent, most landlords take up that responsibility or at least pay partially for it. For instance, once I rented out an apartment in Dubai, and the AC had a big problem (my bedroom was constantly freezing like I was living in Antarctica). After lodging my complaint with the landlord, a maintenance company inspected the AC and concluded that the thermostat needed to be replaced, which had a high repair cost. I ended up paying a small amount of it while the landlord paid for the chunk of the bill. In other apartments, the landlord, primarily a developer, is responsible for all significant issues in your apartment (see the rental section below). However, smaller maintenance items such as lighting fixtures or faucets may be excluded from the landlord's free maintenance. It depends on the landlord and the terms of the contract.
Service charges: For many properties, you may be liable to pay annual service charges to the developer, making an extra dent in your wallet.
You may be stuck with it for a while (inflexibility): If you do experience any of the problems mentioned above, you may find out that the issues are too complex, time-consuming, or expensive to remedy. You may also change your mind or want to move out. Unfortunately, you can't bail. Unlike rent, where you can get out any time you wish (legally, of course) and change your property either by waiting until your rental contract expires or by incurring two months' rent if you suddenly decide to get out, you can't quickly change your purchased property. Even if you choose to sell it in the market, the process may take time, paperwork, and the problem that forced you to sell the property may still rear its ugly head if you still can't fix it. You should never, under any circumstances, lie to the next buyer about the actual condition of your house or any defects that it has, as it is unethical and perhaps even illegal.
Loss of value and depreciation: The myth that a property always increases in value is not valid. It all boils down to several factors such as market conditions, location, renovations, new commercial businesses, and supply and demand. Sometimes, you may lose a quarter, half, or even double your home's purchase value, but the opposite is also true. If you are an investment property owner, depreciation also comes into play, which is the loss in value of a property over time due to physical deterioration.
Advantages of Renting:
Lower upfront costs: Deciding to rent a property will cost you much, much less than owning one in the very beginning. It is essential to consider if you don't have sufficient funds to buy a property through a cash purchase or even financing. Down payments are at least 20% in Dubai.
Less paperwork: If you read the paperwork required to purchase property above, this may be a huge relief, and you won't need a lawyer as well. All you need to peruse is the rental contract and the Ijari (which can be processed by the real estate agent).
Increased flexibility and mobility: As mentioned above, owning a house comes with the disadvantage of being "stuck" with it for a while, at least until you can resell it. As for rent, it may not be a problem at all! You can enjoy moving out of your rented space anytime you wish, either before renewing your rental contract by providing two months' notice to the landlord or paying the equivalent of two months' rent if you want to vacate the premises immediately. For people who want flexibility in their lives, such as nomads, this can be exhilarating. Having multiple options constantly will satisfy such individuals. Renting may also be suitable for people who have just moved to a specific location and are uncertain of their surroundings and people whose jobs or income sources are not steady or stable.
Peace of Mind: Just like homeownership has peace of mind, so too does rent! You have less commitment than owning a house, and you don't have to worry about all the financial strains attached to buying a home. You also don't have to worry about things such as depreciation, losing market value, and all the fees associated with owning a property, including closing costs, taxes (if applicable outside the UAE), and service charges. In short, if the property belongs to someone else, so too are its inherent ownership costs and problems!
Worry-free maintenance: Most landlords provide at least one year of free comprehensive maintenance for their properties, during which they fix major issues associated with the property. Some of them don't have such a limit and will fix any significant problems as long as you are a tenant. However, even after the year passes, landlords are still responsible for providing maintenance to the building structure, common area facilities. They cover major maintenance to the premises such as AC units, electric distribution boards, heat/smoke detectors, fixing any waterproofing or leakage problems, replacing water heaters, and floor and ceiling tiles. Of course, all these maintenance items are not applicable if you or your visitors cause any damage. In this case, you are responsible for repairing such damage.
Disadvantages for rent:
Lack of ownership: First, let's talk about the elephant in the room: homeownership. How does that make you feel? If you rent a property, no matter how pretty or how much time or money you have spent renovating it or taking care of it, it's still not yours to keep. You may have to move out one day, and you will have to answer to your landlord. If the landlord wishes to evict you and reclaim the property for whatever reason, they can do so to the fullest extent of the law by giving you notice. This can be an unpleasant experience for some people. If you own your house, no one can "evict" you unless you default on your payments or break the law. If you purchase a home and complete its payments either by cash or through a mortgage, you won't have to worry about spending money on rent. Some people feel that money paid for rent is thrown away and that nagging feeling may remain for many years, especially once they leave the premises. This is called an "opportunity cost."
Higher long-term expense: This one is relevant to the previous disadvantage. Imagine renting a property for years and having nothing to show for in the end. Sounds like a sad novel, doesn't it? Well, back to Robert Kiyosaki's simplified view of assets and liabilities. Paying for rent takes money out of your pocket, so that is a liability. Let's keep it as simple as that.
Unpleasant rental increase surprises: You may have an unpleasant surprise when your landlord suddenly decides to increase your rent. However, the Real Estate Regulatory (RERA) states that a landlord must provide 90 days' notice for increasing the rent amount. This also applies to the previous disadvantage if the landlord decides to end the contract (or evict you).
Limited options and not so renovation-friendly: Since this home is not yours and was purchased by someone else, its current design or status may not suit your style or needs. Upon vacating the premises, most landlords require tenants to return the property to the landlord in good condition exactly as it existed before the contract's commencement date (except for fair wear and tear). This means that you can't make any major modifications to the property, and even if you do, you will have to return it the way it was in its original condition. Otherwise, you risk losing your security deposit or incur additional fees.
Unpleasant Contractual Terms: Make sure you go through all the articles mentioned in the rental contract, no matter how long. For instance, you may be surprised to find out that pets are not allowed on the premises, as it's clearly mentioned in the rental contract. Another unpleasant surprise that I had personally experienced was an "Annual Rental Contract Renewal Fee," which can cost you a few thousand Dirhams and is usually mentioned in the contract's addendum. In my case, it cost a whopping 2500 AED per year.
The "Should I buy or rent?" conundrum is more relevant today than ever, and property prices are shifting towards a buyers' market. There are several factors to consider to make the most informed decision that suits your personal and financial needs. The best way to answer this question for yourself is to answer the following questions truthfully:
- Can you afford to buy a home, whether by cash or through financing? Realistically, what can you afford right now?
- Do you have a steady, stable source of income that can cover mortgage payments for years to come?
- Are you looking for short-term or long-term?
- Do you need flexibility and more options anytime?
- Can you handle all the costs associated with owning a home, such as maintenance, service charges, taxes (if applicable outside the UAE), and others?
- Do you know where you're currently standing and where you're heading with your career and family goals?
- Do you have a backup plan in case things go awry?
Only you can answer these questions. Contemplate the information presented in this post, and find out what works best for you.