You don’t save rent when buying a property; understand – 07/21/2023 – From Grain to Grain

This week, I heard someone tell me a phrase that many repeat: I’m going to buy a property to save on rent. Possibly, you’ve heard this or similar ones like: get out of rent, buy a property. They are often repeated in advertisements and end up sticking in our minds. I explain why this is not true.

I am not against acquiring your own property, but it must be very well planned. Emotional issues must be put aside.

Every emotional decision costs more. No wonder that annually new cars are released with a slightly different headlight and individuals pay more just to have a headlight with a slight curve. Advertisements make us believe that this change is necessary.

In real estate, it is no different. I often say that the decision to own a property should be purely financial. And rent is always paid. You buy or not.

Either you pay rent to a third party or you pay yourself. In that sense, you always have to weigh a question.

The balance is in your opportunity cost. The amount of rent you pay to yourself is different from what you pay to third parties. Yes, rent paid to yourself can be even higher than to third parties.

The amount of rent you pay to third parties is expressed in the advertisement of the various search engines. Already what you yourself is not the same value. This value is given by its opportunity cost.

In this sense, your opportunity cost depends on how you intend to acquire the property: in cash or financed.

If you have the resources to purchase your property in cash, the account is simpler. Your decision should take into account the net income from income tax that you obtain on CDBs referenced to the IPCA.

Currently, CDBs referenced to the IPCA yield real interest, above inflation, of 6.5% per year. Net of income tax, this return drops to 4.95% per year or 0.4% per month.

Therefore, if your rent exceeds 0.4% of the property’s value, yes, it makes sense for you to evaluate the acquisition of this property, as it may yield you a better income. In this case, it is also necessary to consider that the property appreciates at least the IPCA variation.

The account is simple. If your property is worth BRL 1 million and you pay less than BRL 4,000 a month, then it is better to stick to third-party rent. Remember to only consider the rent, as the condominium, IPTU and other costs are paid if you are the owner or tenant.

In the case of financed acquisition, the opportunity cost is higher. In addition to considering the above account, you must add the cost of bank financing. In this case, hardly any rent will be high enough. That is, buying financed is usually a bad financial decision.

If you have the discipline to repay a loan with the high interest rates in Brazil, you will undoubtedly accumulate more capital if you invest instead of paying interest.

Your focus should not be on buying real estate, but on having a financial asset that gives you the security of living where you want.

So, invest and accumulate enough capital to buy cash and then decide, considering your opportunity cost, whether it is better to pay rent to others or to yourself.

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

Talk directly to me via email.

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