Background
I’m a 25-year old who’s lived in Madrid, Paris, Barcelona and San Francisco in the past 4 years. I’ve lived in 9 different apartments during that period and still live in a rented place.
The inception
This morning a dangerous idea picked up in my mind.
It was about 8 am in Ibiza, where I’ve been staying this week to escape from December’s cold. The sun woke me up gently and as I looked around the apartment and saw the blue sky across the window, I thought: “Wouldn’t it be cool to wake up every morning in a place like this?
However, renting a place like that would be challenging in Barcelona, where tourists pretty much take over the city in summer. The landlord would probably kick me out during the high season and, once again, I’d be looking for a new place.
The problem is I don’t really have a home. For the past months I’ve been spending half of my time in Barcelona and the rest of the time in San Francisco. Since I’m not rich yet, that means finding short-term rentals with some downsides: a higher monthly rent, not having a place to keep your stuff, needing to plan your trips in advance…
Renting has some pluses and minuses: You can move to new places frequently, but it takes time to find a place you like. The money you spend in rent is an expense you’re never getting back. You can’t rent it away for some months if you want to come back to it later. You don’t really want to spend money improving a place you don’t own.
My thoughts drifted a little more and then the idea took shape: What if I actually owned a place?
Buy vs rent
I spend around €1200 a month in rent in Barcelona, and that would go up to around $2000 -$3000 in San Francisco (unless you play smart and homeswap, which makes things a lot easier).
If instead of renting a place I paid €1200 for a mortgage, I could afford to buy something of up to €300k. Paying that back would go on for up to 30 years, so it’s something I should study carefully before making a move.
Total yearly cost: Insurance, taxes.
Weighting the risks
In order to make the best choice I must dig into all the risks and learn a little about the market.
- What if I hate the place and want to move away from it? Then a high demand for housing would play in my favor.
- What if I move to another city? Then it’d be good if I could rent it out easily, ideally making a profit with it or at least not losing money.
- What if prices go down dramatically? Then I’d be stuck with the place, since I’d lose money by selling it. So I need to really like the place, or be able to make enough money by renting it to others.
- Looking at economic reports and forecasts, housing prices will go down in Barcelona during the next year and won’t hit the bottom until next year. Overall, Spain is in a pretty bad situation as well – so selling it doesn’t sound like the right option.
- However, Barcelona will always be Barcelona. People need somewhere to live, and if they don’t buy it they will rent it. Rents didn’t go down as much as selling prices, and tourists are still renting houses for high prices in spite of the recession.
Choosing a place
If I were to choose a place where there’s a high demand for vacation rentals and where I’d also like to live, that’d be in Barceloneta’s beach. It’s close to the center and just by the beach, so renting it out during the summer would be highly profitable.
I found several places in the €300k range. That’d mean paying about €1200 a month –the same amount I’m paying for my rent– plus some extra expenses: insurance, maintenance and taxes.
What’d happen if I lived there for the next 10 years? Oversimplifying, I’d then have over €100k worth of my new place, money I would spend on rent otherwise. I’d spend almost the same monthly amount. However, I wouldn’t be able to move to other cities for that period: I’d sometimes homeswap to other places during the low season and I’d sometimes rent it out in summer for a small profit.
What’s happen if the market went down and I sold it after 5-10 years for a 25% loss? In that case I’d be more or less breaking even, since the money I spent was spent on an investment (an unfortunate one), but not entirely lost as if I had just rented a place.
Can a house also be a business?
With all this in mind, I looked for more information. Agencies can rent out out place for a commission if you’re out of the city. Sites like Airbnb are excellent for high-margin short-term rentals, especially during the high season.
Rental during the year will be around €1000 a month, but can go up to €4000 in summer assuming full occupation. If I decided to go that way, I’d invest some time in promoting the place for tourists through Airbnb and Craigslist targeting high-income tourists. I can use all my online marketing experience to keep demand high, which would be very interesting.
Also, homeswapping is an opportunity if I want to travel “for free” to other cities, and since Barcelona is a popular destination I could easily find somebody to swap places. But the most appealing aspect for me it’s the possibility of running a part-time business by renting it if I’m staying somewhere else.
Final thoughts: Rent to buy
Owning a place is a big liability, but I think in my situation it might be worth it.
I decided a €300k place close to the beach would be best. I double checked with a rental property manager from Ibiza and got the same rental income numbers I was expecting. I sent some inquiries to agencies, to test the waters. I also filled in forms for mortgages online to see what they can offer.
I’ll propose a “rent to buy” scheme: renting the place one year and keep an option to use that money to buy it after a year. If that works I’ll definitely do it. If not, I’ll consider renting it for a few months (and throwing that money away) and buying it after if I’m still happy with it.
In any case, I’ll be posting a follow up to this post on this blog, so stay tuned!
Links
- Buy vs Rent calculator [NY Times]
- EDIT: Comments about this post on Hacker News with great insights and refuting some of my points.