Three ways to acquire a property and which one I prefer – 06/30/2023 – From Grain to Grain

Real estate is usually the biggest investment that most individuals make. While most spend a lot of time dreaming about their acquisition, few spend time planning. The consequence of lack of planning is reflected in the cost paid. So, I comment on three basic ways for you to decide which one is best.

There are two ways to buy a property. Either you have the cash and pay upfront, or you finance the acquisition. In the latter case, the two usual vehicles are the bank loan and the consortium.

To evaluate these three forms, let’s use an example. Consider that you have R$100,000 and want to buy a property for R$600,000. So you have three alternatives:
a) – Take out a bank loan for the remaining R$500,000;
b) – If you use a consortium to receive a letter of credit of R$ 500 thousand;
c) – Living on rent while investing to accumulate and acquire the property in cash.

Most use the first alternative and the minority uses the third.

Which alternative do you believe has the highest cost and which has the lowest cost?

To analyze it, we have to make some assumptions:
1 – The IPCA and INCC in the coming years will be 4.5% per year;
2 – The price of a property today should increase with the IPCA. According to FipeZap, since 2010, that is, in the last 12 years, real estate has had the same appreciation as the IPCA;
3 – The real interest in the coming years will be 5.5% per year. This is easily accomplished by applying to CDBs within the FGC;
4 – The average monthly rental expense is equivalent to 0.35% of the value of the property. This is an average presented by the FipeZap portal;
5 – The Referential Rate, or TR, which corrects financing is 1.5% per annum.

I considered an equal period of 200 months for the three alternatives.

Assuming the valuation of the IPCA estimated above, the R$ 600 thousand property should be worth R$ 1.35 million at the end of the 200-month period.

Let’s start the calculations with bank financing.

The advantage of this alternative and the reason everyone uses it is that it satisfies your craving right away. You can buy the property as soon as you become interested in one.

I calculated the financing of a R$500,000 loan from the four largest Brazilian banks. The average effective rate was 11.7%+TR per year.

In this case, at the end of the 200 months, you will have paid a total of BRL 1.13 million for the acquisition financed with a bank loan. The average monthly installment will have been R$ 5.14 thousand.

In the case of the consortium, let’s assume that the letter of credit is obtained in the first few months. There are ways to achieve this and I shall write shortly.

By choosing the consortium alternative, at the end of the period, you will have spent between installment and down payment a total amount of R$ 1.09 million.

In this way, the consortium is a little cheaper than bank financing. You save R$ 40 thousand.

However, the consortium carries some additional risks.

In financing, the combined interest rate does not rise and there are chances of the interest rate falling and you carrying out a portability paying lower interest. While in the consortium, the risk is that the INCC will skyrocket and the installment will rise much more than expected.

Finally, let’s look at planned acquisition by investment.

In this case, it should be considered that you will spend on rent until the end of the 200-month period. Thus, the total expense of rent, down payment and savings in the period will be R$ 1.04 million.

Therefore, this is the cheapest alternative to purchase and the one I recommend. You save almost BRL 100,000 compared to the purchase financed with a bank loan.

The downside is that your dream of acquiring a property is postponed.

But it has two other big advantages. First, as real estate is one of the biggest investments made, this alternative is the one that allows you to better plan and make sure that the investment to be made is the most appropriate one.

Especially at the beginning of adult life, the property acquired is not usually ideal and it ends up being necessary to exchange it. This is due to job change or family growth.

The other big advantage is that the planned purchase gives you the flexibility and liquidity to eventually use the capital even more productively and profitably.

And for you, which of the three alternatives do you prefer when purchasing a property?

Want access to the spreadsheet I used for all calculations? Click here.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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