Whether a young professional who has just gotten a life-changing job or a family who has lived in a rented apartment for years and is now considering owning their own space, the renting vs. owning a home debate is a practical one for many people.
After many years of financial advisors and experts deliberating on the question, there is still not a one-size-fits-all answer. While buying can make financial sense for someone living in Abu Dhabi, for example, it may not make sense for someone with similar personal finance living in Dubai.
Moreover, this is one area where non-financial factors play a huge role for many people. Many say: “I know renting makes more sense than buying a new home but I believe homeownership will give me a sense of personal fulfillment.”
What can a financial advisor say in response to that?
In what follows, we will seek to bring clarity to this question and help you make an informed decision that will make the most sense of your financial future. We will also examine how you can continue to build wealth irrespective of which path you end up following.
We’ll cover:
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The first step to take is to lay bare the costs associated with renting vs owning a home.
Let’s start with renting a home.
The main cost of renting a home is the rent you will be paying every year. In the UAE, landlords may increase rent at most once a year, according to Driven Properties, a real estate firm.
In Abu Dhabi, Ras Al Khaimah, and Fujairah, the rate of increase is capped at 5%, according to Legal Consultants UAE, a law firm. Things are a bit more dynamic in Dubai. According to Mada Properties, a real estate firm, the guideline is as follows:
However, annual rental increases in Dubai do not usually exceed 5%, according to Driven Properties.
What about the costs of owning a home?
We can classify these into four categories:
It will also include property taxes and homeowner association fees (HOA fees) for countries like the US.
All of these costs show why the renting vs owning a home debate cannot be reduced to the question: “is mortgage cheaper than rent.”
Affordability goes beyond the mortgage interest rate (even if you get a discount for good credit score or being a first-time home buyer). Thus, we should be comparing the total costs of owning with the total cost of renting.
When buying a home, there is an opportunity cost to the cash you will pay for the downpayment and the upfront costs. You could invest that money passively in a portfolio created for you through Sarwa Invest or actively by creating your portfolio on Sarwa Trade.
A simpler way to think about this is to see the opportunity cost of investing the downpayment and upfront costs in the stock market as a benefit of renting as opposed to owning a home.
In that case, the net benefit of renting a home is the portfolio value from investing the cash that would have been used for downpayment and upfront costs minus the rental cost over the same period.
Let’s say Mr. A is comparing renting a home with buying a home (with a 25-year mortgage). In that case, the net benefit will be the portfolio value of the cash invested at the end of 25 years minus the rent that will be paid over that period.
The main benefit of owning a home is that you have an asset that appreciates. This is especially impactful if the home is in a prime location.
Thus, the net benefit of owning a home is the property value minus the total costs incurred (as outlined above). For Mr. A, this will be the value of the property after 25 years minus the total costs incurred over that period.
To summarise, when deciding whether to rent or buy a home, the financial part of the decision reduces to comparing the net benefit of renting with the net benefit of owning. If the former exceeds the latter, renting makes more financial sense and if the latter exceeds the former, buying makes more financial sense.
For the sake of simplicity (and based on everything we have discussed so far), the renting vs owning a home debate reduces to two questions: First, which is more likely to have a higher rate of return between investing in the stock market and building equity in your home. Second, which is more likely to be costlier, paying rent or buying a property.
Let’s start with the first question.
The average annual home price appreciation in Dubai and Abu Dhabi in 2024 was 3-4% while the average rental yields were 6-8% in Dubai and 5-7% in Abu Dhabi, according to Next Level Real Estate, a real estate firm. This gives a total return between 8% and 12%.
In that same year, the S&P 500 Index provided a total return of 25.02%.
Similarly, the UAE residential property price index grew by 1.82% compounded annual growth rate (CAGR) between 2004 and 2024, according to data provided by CEIC, a resource for global economic data. If we add a 6-8% rental yield, we have an average annual return of 7.82-9.82%. During the same period, the S&P 500 provided an average total return of 11.70%, according to data provided by Aswath Damodaran.
Source: CEIC
One point to note is that the gap between stock investing and real estate investing will widen when we are considering an owner-occupancy home. This is because the rental yields component will no longer apply since the homeowner is the one living there – the property is not rented out. Thus, in the examples above, we are comparing 25.02% with 3-4% and 11.70% with 1.82%.
The calculation done by Ghebre and Chu considers this fact. They calculated an average annualised growth rate of 2.36% and 12.12% for properties in Dubai over the last ten and five years respectively. In contrast, the MSCI ACWI ETF (an ETF that tracks an index that consists of developed and emerging markets stocks) returned 8.56% and 13.18% respectively while the S&P 500 ETF produced 12.45% and 16.44% respectively over the same periods.
Annualised growth rate of Dubai properties vs the stock market
You can get a better view of the comparison through the charts below:
The bottom line from these stats is that investing in the stock market is more profitable than real estate.
Let’s go on to the second question: which of the options has lower costs?
It’s hard to answer this question outrightly. Factors like the rate of rent increase, mortgage interest rate, and inflation rate will impact any analysis. Moreover, the locations of the rented apartment and the purchased home and the state of the housing market are other relevant factors.
What then?
Given that investing in the stock market is generally more profitable than investing in properties, when to rent and when to buy will depend on the comparison of costs. Let’s consider various scenarios and the appropriate decisions:
However, there may be unusual circumstances when the anticipated property value exceeds the portfolio value (the property is in a prime location and stocks experience some consecutive years). In that case, the appropriate decisions for each scenario are as below:
Let’s conclude this section by examining an example provided by Ghebre and Chu.
It’s a comparison between renting a one-bedroom apartment and buying a 1300-square-foot 2-bedroom apartment in Dubai.
We’ll follow the steps we have outlined above:
They also assumed a fixed mortgage rate of 3.94% which brings the accumulated mortgage interest to AED 1,101,290.23:
Finally, the ongoing costs add up to AED 2,095,176.32 over 25 years.
The net benefit of renting will then be -AED 970,388.49.
The net benefit will then sum up to -AED1,326,301.31.
To summarise, for this example, renting is preferable to buying it since -AED 970,388.49 is greater than -AED1,326,301.31.
You can adapt this example for your situation by adjusting the figures based on the relevant real estate market. The aim is to show you the steps involved in the calculation.
Though there are various buy vs rent calculators you could use, they all focus on the cost component (and mostly ignore ongoing costs) to the exclusion of benefits.
Ultimately, renting vs owning a home cannot be reduced to a mere financial decision.
Below, we consider these non-financial factors that you should consider:
“Still, despite the risk, added expense, and extra chores associated with owning a home, many people choose it over renting,” according to Investopedia. “It provides a more permanent place to raise children. It is also frequently the only way to have, or create, the sort of residence people want. Ultimately, the decision to rent or to own is not just financial. It’s also emotional.”
These non-financial factors can become even more important when the gap between the net benefit of both options is narrow.
If Mr. A values customisation, permanence, and predictability, then renting being AED 50,000 better than owning over 25 years will make little difference and non-financial factors will likely have the day. Also, if Mrs. B values mobility and flexibility, owning a home being AED 50,000 better than renting over 25 years may be less important.
In essence, you have to determine the net financial benefit and compare it with the subjective value you ascribe to these non-financial factors before making a final decision.
Irrespective of the choice you make – buying or renting – you should remain committed to investing in the stock market, according to Ghebre and Chu.
If you rent, your investment strategy should go beyond putting the cash you would have used for downpayment and upfront costs in the stock market. You should also have a systematic investment plan where you are investing a portion of your monthly income in the stock market.
Similarly, if you own a home, your investment strategy should not be limited to your home equity. Rather, you should also be committing a part of your monthly income to investing in the stock market.
What portion of your monthly income should you be investing? It’s 20% if we follow the popular 50/30/20 rule.
According to this rule, 50% of your income will go to your needs (food, clothing, transport, minimum payment on credit cards, etc.). If you are renting, your monthly rent will be part of these needs. On the other hand, if you own a home, mortgage interest and the ongoing costs we highlighted above will be part of your needs. Also, 30% of your income will go to your wants or discretionary expenses (eating out, vacation, entertainment, etc.).
The remaining 20% will be for saving/investment. Ideally, you should first use this money to build an emergency fund. After that, you can invest in an efficient portfolio created to match your time horizon, investment goals, and risk tolerance through Sarwa Invest or create your portfolio of stocks and ETFs through Sarwa Trade.
The best approach to choosing between renting and owning is to follow the costs vs benefits template we have outlined above.
However, if you are not willing to take the time to go through that process, you can use some rules of thumb that have been created by various financial experts.
We highlight some of them below:
The price-to-rent ratio is the purchase price of the property you are considering divided by the annual rent of the apartment you are currently living in.
If this ratio is 17 or lower, you should buy but you should rent if it is higher than 17.
For example, if the purchase price of a property is AED 5,000,000 and your current rent is AED 400,000, then the price-to-rent ratio is 12.5, which means you should buy.
If the annual cost of owning a home is more than 4% of the purchase price (or the home value), you should stick to renting. The annual cost will include mortgage interest and ongoing costs.
Suppose the annual cost of owning a property with a purchase price of AED 4,000,000 is AED 500,000. The cost-to-price ratio is 12.5% which means renting is better.
This rule states that you should rent if the monthly cost of owning a property (again, mortgage interest plus ongoing costs) is more than 30% of your monthly income.
Suppose the monthly cost of owning a property is AED 41,700 and your monthly income is AED 100,000. In that case, the monthly maintenance cost is 41.7% of your monthly income, which means you should rent instead.
Renting should be preferred over home purchase if you don’t plan to spend at least five years there, according to this rule.
This is because it takes time for the value of your home to appreciate to compensate for the upfront costs associated with the purchase. If you have a short-term horizon, any capital gains on the property might be insufficient to even cover the upfront costs incurred.
This is a rule of thumb provided by the Money with Katie website. It states that you should consider buying if your monthly rent is more than 1.53 multiplied by your monthly mortgage payment.
If your monthly rent is AED 25,000 and your monthly mortgage repayment is AED 15,000, it will make sense to buy since your rent is higher than AED 22,950 (1.53 * AED 15,000).
The decision is easier when it comes to buying a home for rental income. In this case, it is a pure investment decision and non-financial considerations have a smaller impact.
As we have seen, investing in the stock market is more profitable than investing in real estate (even in Dubai where rental yields are high). Thus, from the perspective of returns, stocks are superior.
However, there are other reasons why stock investing is superior.
First, real estate is illiquid. Properties take time to buy and sell and their prices can change while waiting to find a counterparty. This is unlike stocks that can be bought and sold in minutes on a brokerage platform.
Second, real estate is inaccessible and harder to diversify. Very few people can buy a property with cash only and not many people can even put down 20% of the purchase price. Given the high cost of properties, diversifying into multiple ones (to reduce risk) is harder. On the other hand, you can purchase a fraction of a share of a stock, which makes it easy to purchase many shares even with a low initial capital.
Third, the maintenance and closing costs of properties are high. In contrast, the commissions on stock transactions have been coming down. You can even buy ETFs and index funds at very low expense ratios. Relatedly, owning properties requires active management or paying someone else to oversee them. Owing stocks do not require such time investment.
If you are still interested in real estate as an asset class, REITs are a better option to pursue. These are stocks of companies that buy and sell properties (equity REITs) and those that finance mortgage loans (mortgage ETFs).
REITs are traded on the stock exchange market like stocks which makes them accessible, liquid, cost-effective, and amenable to diversification.
Interestingly, REITs have historically gone head-to-head with stocks in terms of return on investment. A 2024 study by Sortis Capital, a financial services firm, found that REITs have better annual returns over the last 50, 25, and 20 years while stocks come out on top over the past 10 and 5 years.
Source: Sortis Capital
If you choose to rent, you can invest the lump sum you would have used for downpayment and upfront costs with Sarwa to start your journey to wealth.
And whether you rent or buy, you can create a systematic investment plan with Sarwa. By investing regularly with Sarwa Invest or Sarwa Trade, you can enjoy the benefits of compounding and take small but steady steps towards wealth.
Also, if you want to invest in real estate without the cons associated with rental properties, you can purchase REITs on Sarwa Trade. If you choose Sarwa Invest, REITs are already included as part of your efficient and personalised portfolio.
Are you ready to start your journey to wealth? Sign up for Sarwa to invest in a personalised and efficient portfolio or create your portfolio of stocks and ETFs.
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