To Rent or to Buy

Imam Imot Magazine, vol.2, February 2010

Has the time come when more and more people in Bulgaria will prefer to rent a property than to pay big mortgage installments? At first glance we might be embracing this practice which has long been the case in many of the developed countries. Last year the ratio between the number of rental and sale property deals is 70 to 30. But still 2009 was the year of the peak of the economic crisis, the property sector was hit hardest and the number of concluded deals decreased drastically – by up to 50%. In the smaller towns the market was at a complete standstill, there was some activity in the big cities, mainly in Sofia and Varna. That is why for now sales agents are cautious in predicting whether there is a change coming in favor of renting – also a result of the more dynamic life we lead and people’s bigger mobility.

You rent if you don’t have saved money and security for your income. You buy if you need a new home and have the money for it. These are the most common answers experts give to the question which is better – to rent a home or to buy one with a loan.

It’s a fact that there is no universal recipe that would help you make the right choice. It depends on many factors and is different for everyone. Nevertheless, there are a few unwritten rules which should be followed when one faces such a dilemma.

Not long ago a top banker admitted the following: “If I have to choose whether to rent or buy a property with a loan I would never buy. At present rents are much more non-committing and without an interest rate. Of course, an important element is the fact that the purchasing of a new home is an important part of the national psychology of Bulgarians.”

On the whole, the two things cannot be compared in view of the end result because the aim of the purchase of a real estate is not only to live in it but also to make a long-term investment, says Polina Stoykova, Chief Operations Manager of BULGARIAN PROPERTIES. However, both variants solve one and the same need people have – that of having a home.

The choice between renting out and buying depends on the financial status, the manager of a leading lending center comments. According to real estate agents one of the main factors tipping the balance in one or the other direction is how much people feel secure in their job right now.

The advantage of renting a property is that at present rental levels all around Europe are going down and in Bulgaria they are lower compared to the rest of the EU, a leading agency adds. However, it is important how big the family is – when it is a couple that needs a studio or a one-bed apartment renting is a good option. Currently, rental prices for such an apartment in Sofia vary between 150 and 300 euro which is quite affordable for two people, the agency says. But if the family has more members and needs a two-bed apartment then the purchasing of a home would probably be a better choice as now the demand of large apartments is low and after negotiations a very good price could be bargained, real estate agents advise.

A home would be a good investment for a big family that wants to leave a property for their children. “We Bulgarians value greatly the possibility to have our own home and I think the issue of renting or buying should be: I will rent until the time is right to buy and until I can afford to have my own property,” comments Polina Stoykova. She enumerated a few advantages and disadvantages of both variants. The purchase of a property, even when it is with a loan, means the buyer to have their own finances amounting to at least 30% of the property’s price, as well as a stable income and money for furnishing, if necessary, so that they could start using the place as soon as possible, adds Ms Stoykova.

Besides, owning a property means expenses for its maintenance and the payment of taxes and fees. It is possible to buy a property with a loan and then rent it out, the money from the rent paying the installments under the loan. But as this scheme was used a lot during the property boom and the supply on the property market is big there is a possibility the property to remain vacant for a while or the rental price not to be high enough to cover the installment under the loan.

The renting of a property could mean bigger insecurity in a mid-term and long-term plan but it gives the lessee bigger flexibility to change their address and to optimize their monthly expenses, which is not to be underestimated in view of the dynamic life we lead today. It is a fact that many of the people want to have their own home so they could furnish it as they want. But now there are many rental offers for new furnished apartments which offer a very good standard of life.

What is difficult to calculate and forecast with loans is the interest rate as it is not fixed and varies depending on different factors defined by the bank. This means that with any change in the interest rate under the loan the monthly installments must be recalculated and the monthly expenses might become more than expected, as is the case since the beginning of the crisis. Also, it is difficult to predict the expenses of the household in the next 20 years so the equation becomes one with too many unknowns. We should also add the fact that the bank wants proof of the monthly income that would cover the installment and there would be enough money left for one to live on, as well as a number of other requirements which are quite strict. Thus we often come to the conclusion that at present it is very difficult to get a loan for purchasing a property, Polina Stoykova says. If you have ready cash you should not hesitate but invest it in a property as now is the best time for that – there are great bargain properties on the market which were not available only a year and a half ago.

Even if you don’t manage to get the full sum in cash to buy the property you have chosen you can turn to the bank for the rest and if you fit the criteria you could get a loan, advises a credit expert. According to him people who can ensure a high percent of self-participation and depend less on the bank are at a better position. On the one hand, this makes them less risky for the bank and it would approve them easily. On the other, the higher the self-participation the lower the monthly installment would be. This means the installment could be similar to the rental price of a similar home and will make the purchase the better choice.

BULGARIAN PROPERTIES: Advantages and disadvantages of renting or buying a home:

BULGARIAN PROPERTIES made the following calculation on the basis of the average sale and rental prices of properties in Sofia. The company assumes that the average rental price of the most rented apartment types is between 250 and 400 Euro. We compare it to the purchase of an apartment whose price is 60,000 Euro. BULGARIAN PROPERTIES explain that with this sum would be enough for an apartment with an area of 70-80 sq.m., but many of the buyers look for apartments under 50,000 Euro.

1. Of these 60,000 Euro the buyer must have at least 20,000 Euro because usually banks require a minimum of 30% self-participation. So hypothetically 40,000 must be taken as a loan. Currently, banks give out loans with interest rates of between 8.5% and 10%, or an average of 9%.
The monthly installment would be about 500 Euro, but all the different fees (which vary in the different banks) must also be added to it. According to the latest data the average salary in Bulgaria is about 580 leva, i.e. this makes two average monthly salaries or almost the whole income of an average Bulgarian household. In this case it would be better to rent than to buy an apartment, BULGARIAN PROPERTIES advise.

2. If we change the parameters – for a case when the buyer has the bigger part of the money in cash and will get a loan of only 20,000 Euro having to pay a monthly installment of about 250 Euro. In this case it would be better for the buyer to invest their money in property, especially after prices fell by almost 30% compared to last year.
In this case the monthly installment is close to the rental price. Besides, the buyer could consider the opportunity to get a loan for a shorter period or to repay it early.

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