It’s the dream of most people to own a home some time in their lives – so they won’t have to deal with crazy landlords, noisy neighbours, or having rent prices constantly go up and fear of eviction. Owning their home gives most people an impression of a stress free, peaceful, happy and quiet lifestyle. However, there is much more to owning a home than most people realise. In this article, I will explain the pros and cons of buying vs renting, and which might be best for your situation.
We won’t talk much about all of the emotional/mental pros and cons of renting vs buying. This will be mostly taken from a financial perspective, so keep in mind – even if one of the options make more sense financially, ensure you weigh in other emotional/mental factors based on your personal experiences.
Quick Disclaimer: This article is a simplification, is not financial advice and is merely for educational purposes. It is meant simply to guide you in the right direction. Never blindly listen to a random guy on the internet.
Setting the Scene
You’ve been renting the ground flat of a home for $70,000 GYD per month from a very reasonable landlord for quite some time, but with the recent boom in the economy due to the oil and gas findings, rent prices have been hit significantly along with the prices of commodities. Due to all of the increased demand, your landlord is finally coaxed to leave a note on your doorstep saying…
I’ve delayed this for quite some time due to our contract, but I have to increase your rent in 3 months, as I am getting offers from expats working in the local oil and gas sector for $90,000 per month. I hope you understand, but if you do not agree to these new prices I will have no choice but to evict you as $70,000 is not sufficient rental income anymore.
– Reasonable Landlord
Now, your salary is $220,000 GYD monthly and your wife brings home $140,000 GYD. That is definitely going to leave a dent in your earnings; so you start looking online for other renting opportunities and even consider buying a home or starting to build. Problem is, you don’t really have that much in the bank as your balance is just over $450,000 GYD.
Finding another place to rent is harder than you expected. Everyone is either asking for $50,000+ for a cramped quarter of a house, or $120,000+ for similar sized units like the one you are renting. That leaves you with two options – either you bite the bullet and keep on renting, or get a mortgage and build or buy a house.
House Prices in Guyana
House prices in Guyana tend to start from around 10 million GYD on the low end, to 20 or 25 million in the middle and upwards of 50 million on the high end. You believe that you are somewhere in the middle of the low to medium priced house range based on your current financial position. That means you are looking to spend around 15 million.
So let’s recap our two choices
| $15,000,000 GYD mortgage | Proposed House Cost |
| $90,000 GYD monthly | Changed Rental Cost |
The best rates for regular income mortgages in Guyana are somewhere around 6% per year
– Taken from NBS website, Aug 2021
A 6% yearly payment on $15,000,000 GYD works out to around $75,000 GYD per month. This is way less than the proposed rent raise by your landlord in 3 months, and is barely any higher than your current rent amount! Why were you even renting all this while? How could you not know about this? You can have your own home for just $75,000 GYD per month. However, owning a home is not all about mortgages. There are many hidden costs to owning a home that you never have to worry about as a renter.
Hidden Costs to Consider when Buying a Home
There are a few costs that you need to look at when deciding to buy a home that renters do not have to take into consideration. We’ll go into each of these in detail.
- Property Taxes/Fees
- Maintenance Costs
- Cost of Debt (Mortgage)
- Cost of Equity (Opportunity Cost)
Most of these are what we call “unrecoverable costs” – meaning you won’t get anything back for spending the money. With renting, there is one unrecoverable cost that you bear – the cost of your rent. Ownership has many.
Property Taxes/Fees
Renters do not have to worry about paying for garbage collection, NDC fees for maintenance of public infrastructure, septic services, etc. These are all fees that come with owning your own home. They may not be expensive on their own, but when combined over a year they can tend to add up to a significant amount. In most countries, you can expect to pay somewhere around 1% of your house’s value in these types of fees per year. That means on a $15 million home, you can expect to pay around $150,000 GYD per year in these miscellaneous fees.
Maintenance Costs
Renters also do not have to take any form of maintenance into consideration. If a pipe breaks, just call your landlord. Door hinge broken? Get the landlord to deal with it. Ant infestation? No problem. House needs to be washed? There are a ton of things that landlords have to think about that you do not have to consider. This ends up costing a house owner somewhere around 1% of the home’s value per year. Expect to pay around $150,000 GYD per year fixing things in your home if you own it.
Cost of Debt
Debt always has a cost attached. When you borrow someone’s money they always expect that you pay it back with some interest added to compensate them for the risk of lending money – since there is always a chance that you are unable to pay back what you borrowed. This cost of debt is defined by our interest rate. When paying off a mortgage, part of the money goes to the actual house to build your equity, while some of it goes to your bank as interest. This interest portion is the “unrecoverable” portion of the payment as once it goes to the bank, we never see it again. That forms part of the bank’s profit. In Guyana, interest rates are somewhere around 6% per annum.
Added to this cost sometimes might be something called Mortgage Insurance. Usually, if your lender is not fully happy with your financial situation (income/expenses & debt), they may require you to purchase mortgage insurance. They do this for more “risky” clients – meaning clients that they think will have a higher chance of defaulting on their loan. This will be an added cost that you will have to consider. In many countries, the lender may require you to put more than 20% down or more in order to get rid of this mortgage insurance.
Cost of Equity (Opportunity Cost)
So far we’ve dealt with costs that may be easier to understand. This one however, is a bit abstract. I will try my best to explain it in a simple manner. I will use these titles to describe this cost: Cost of Equity, Opportunity Cost, Cost of Locking up your Money, Cost of Illiquidity.
When you put money into a house, you’re deciding to “invest” a huge portion of your life’s earnings into a single asset that can take weeks, months or even years to sell if you decided that you wanted to get back the money out of the asset. 15 million GYD isn’t easy to come by for most people, so think of putting money into a house like taking that 15 million and simply burying it in the ground. Sure, you get the use of this 15 million for shelter, but other than that it doesn’t do much. It is literally money stashed away in the concrete walls of your house. The only way to get this money in most countries is to sell the house. This is the cost that you pay for putting all this money into a house.
Now to take it a step further, suppose you didn’t need the 15 million for the sake of spending it on fancy foods and clothes (so you’re fine with it being buried) – but instead, a “once in a lifetime” business deal came up, and it would be really nice to have 15 million to invest into this business which is capable of doubling your money in 2 years; or even just 5 million. Guess what, even though you technically own 15 million (in the house) you have no cash to invest into this business, so you miss out on the opportunity – hence the name, opportunity cost. So instead of doubling your 15 million to 30 million in 2 years with this business, maybe your home value went up to 16 million. You’ve therefore missed out on 14 million dollars because you decided to own a home.
Homes are illiquid assets (cannot be sold as quickly as others). Assets like shares in companies are far more liquid and offer quick access to the underlying value of the assets in a short period of time when compared to real estate. Similarly to a promising business opportunity, on average, global stock markets return an average of 5% – 7% per year whereas real estate (houses) returns an average of 3% per year. This means by having your money in houses, you are trailing stock returns by 2% – 4% – meaning your money could be put to better use from a financial and liquid perspective.
Combined Costs (The 5% Rule Introduction)
As you can begin to see, these costs tend to add up and average out to around 5% of your home’s total value per year, to upwards to 9% per year. These are all things that renters can simply ignore for the most part. You may read more about this online by searching “the 5% rule rent vs buy” on Google. Most experts say 5% due to conditions in the US and Canada, but for Guyana we have to use adjusted numbers based on our interest rates here – bringing us closer to 9 or 10%.
This rule’s formula is as follows: (Current Rent x 12) / 0.05 = Home you can afford to buy if you wanted the monthly cost to be similar to your current rent. I’ve modified this for the Guyana context based on our interest rates to (Current Rent x 12) / 0.08. This gives you a more realistic estimate.
So in your case, the formula will look like this:
($90,000 GYD x 12) / 0.08 = $13,500,000 GYD
This means a $13,500,000 home mortgage will cost you on average $90,000 per month
So in order to buy your $15 million GYD home, we’ll just shift around the formula to see how much it would cost us on average. Our formula will be ($15,000,000 x 0.08) / 12 which equals a monthly cost of around $100,000 GYD – more than the $90,000 your landlord is asking for. Note the disconnect between considering just the monthly mortgage payment of around $75,000 GYD which seemed like a deal and the more realistic cost of $100,000 GYD monthly once we factored the hidden costs.
Let us recap our findings
| Rent after Increase | $90,000 GYD monthly |
| Mortgage on $15,000,000 GYD | $75,000 GYD monthly |
| Total Cost of owning a 15 million home | $100,000 GYD monthly |
| Home you can afford with a monthly cost of $90,000 GYD | Home worth $13,000,000 GYD |
We can clearly see that it makes more sense financially to continue renting for now, if we really want a 15 million home
It only starts to make more financial sense to buy a home vs rent when the total monthly cost of owning a home is lower than the amount you pay in rent. Obviously there are a lot of other factors to consider and this is a simplification.
Now let’s say the numbers make sense to buy and you decide to buy a home, this next question will tend to come up frequently.
Is it better to pay in cash or get a mortgage?
Borrowing money, or using debt for leverage is an amazing way to gain control of things today, and worry about paying for it later. This can be amazing for persons who simply do not have enough of a lump sum today, and want access to relatively pricey assets* like houses or cars. It can sometimes be very hard or near impossible to save up that much money to pay completely in cash for your house depending on your situation. That’s where mortgages come in – but is it a good financial decision?
Dollar Amount
Getting a mortgage for 30 years will add an additional 50% – 100% of the entire cost of your home. So, for a home costing you $10 million GYD – if you paid over 30 years with a mortgage, you’d end up paying somewhere around 5 – 10 million GYD in interest in addition to the cost of your home depending on your interest rate.
At first glance, this seems like a blatant rip-off! Paying double for the same home doesn’t make sense at all. However, there’s more to buying a home than just the plain dollar amount.
Inflation – The Hidden Tax
When dealing with money in long periods – over 20 years, it is imperative to consider inflation as this is the point at which inflation usually halves your money’s value globally (assuming a 3% average inflation rate). Roughly every 20 years, money’s buying power decreases by 50%. This is what is happening when you notice the price of everything is going through the roof recently. It happens gradually over long periods of time, so it tends to go unnoticed by the majority of people. If you saved $100 today, in 20 years that $100 would only be able to buy you $50 worth of goods or services. Remember when a “Chubby” soda from your childhood used to be $40? That same Chubby is worth $120 today. That is how inflation works.
Inflation seems bad; it seems like something you should hate – but it becomes especially useful for long term loans like mortgages if you use it to your advantage.
Using Inflation to your Advantage
You borrow $100 from someone today and they say they’d like the money back in 20 years, but you have to give them an additional $50 in interest. It looks like a bad move at first glance. Why would I pay $150 if I just borrowed $100? Keep in mind however, you borrowed $100 of today’s money and you’ll have to pay back in 20 years. We said before that the value of your money decreases by roughly 50% every 20 years, so $150 in 20 years will only be worth $75 dollars in today’s money. So even though it seemed like you paid more, you actually ended up paying arguably less. That is the beauty of mortgages – you get to borrow today’s money and pay back in tomorrow’s money which is worth less. Even though it looks like you are paying millions of dollars more on paper, many times it is actually in your favor.
Side Note: Bad Types of Loans
Now, I’m not saying to go out and borrow money for everything. Mortgages are one of a kind and you should not treat other loans in this way. Mortgages tend to have lower interest rates than most other loans, and also because of the length of mortgages, as any loan over 20 years tends to benefit from inflation the most. Stay away from carrying credit card balances, stay away from payday loans, stay away from car loans on new cars (because of depreciation [that’s another topic]) and most of all – avoid things on hire purchase. Pay for your sofa set, television and fridge from COURTS in cash and nothing else. Anyway… I digress.
Closing: When to get a mortgage?
If you put 0% down and finance the entire $15 million of your house with a mortgage in Guyana’s context (interest rate of 6.25% along with other homeowner costs), you will pay on average $103,000 GYD per month. This comprises of 6.25% cost of debt, along with property and maintenance costs of 1% each, totalling 8.25% per year.
If you put 100% down (pay entirely in cash), your house will only end up costing you $75,000 per month on average. This comprises of an opportunity cost of 4% and property and maintenance costs of 1% each, totalling 6% per year.
Based on everything we discussed with various calculations, you should only get a mortgage and intend to benefit financially from it when the interest rate of the mortgage is 4% or lower. Any mortgage rate higher than that, put as much of your own money into the house or buy it entirely in cash to save on costs.
Feel free to play around with this spreadsheet I created.
