Should I buy or rent as an expat in Europe?

This is a question we are frequently asked- whether one, as an expat living in Europe, should rent or buy, and right here we can give you the definitive answer: it depends.

We will expand on this so you can be aware of some of the factors to consider if you are thinking about buying a property in Europe as an expat. We provide a framework for the important buying versus renting analysis; and some key principles to be mindful of.

Done right, purchasing a property in the country you find yourself living, can be a rewarding experience and a profitable exercise; done wrong it can be an expensive headache.

As a brief preamble, our approach to property is that it can be an excellent asst class as an investment, and as a primary residence it can provide security, stability, happiness, and healthy returns on investment when done right. It is not absolutely good or bad and you should consider your specific circumstances before making a property purchase decision.

Principles

The first and most important principle is that property is not a risk-free asset. This is important to remember. Because property is not repriced everyday like other growth assets such as shares, it can create a perception that property can be less volatile than it actually is.  Values can go up and down. We mention this in the pros and cons table below. If your property reduces in value, as some have in recent years, and you are required to sell, you could find yourself in the position of selling it for less than you purchased it for, or even for less than the size of your mortgage. That cold mean a scramble to find other funds to pay out the rest of the home loan.

The second principle is time. This is consistent with other assets that can go up and down in value. To address the risk we present above, it is generally recommended that you plan to hold the asset for a longer period of time. In simple terms, the longer you hold the property, the lesser is the risk of finding yourself in a negative equity position and the greater the opportunity for capital growth. The appropriate time is specific for each market and the stage of the market cycle. If you are considering spending only a few years in a city, you need to carefully consider this risk.

The third principle is quality of life. When you are making a decision as important as purchasing a property to be your primary residence, you need to look beyond the numbers on a spreadsheet. A home provides security, a place to escape the world, and a place to express what is most important to you and your family. There are factors to consider such as community, convenience to schools, shops and transport hubs, and the commute to your place of work or study.

Factors to consider

There are a number of practical factors to consider when you are thinking about buying a home. Consider these in addition to the principles above. Some of these will be different in different cities and countries across Europe.

🟠 What are the purchase costs? These can be as low as 2% or higher than 10%. When you are calculating what you can afford, you need to add in the amount it will cost you in purchase taxes and fees. If you live somewhere with low acquisition costs, this low barrier to entry may make the proposition more attractive, and conversely a higher cost might make you reconsider.  Using 6% as an example, if you purchase a property worth €550,000, your acquisition costs will be €33,000.

🟠 What is the tax treatment when you are a homeowner? We are not tax advisers, and we urge you to get tax advice and clarity on the tax situation on real estate before purchasing. You may need to consider how it applies to wealth tax, if there are tax deductibility components of the mortgage payments, and/ or if there is capital gains tax payable on sale. Its different for each country, so make sure you get tax advice specific to you.

🟠 How does your cash flow compare? This is an area we can provide guidance. It is a useful exercise to compare your rental costs against expected mortgage repayments to assess the relative attractiveness of each option and the viability of servicing a mortgage. You need to consider more than just mortgage repayments though. Remember to add in insurances, body corporate fees, local and regional taxes for homeowners, and potentially higher maintenance costs.

🟠 What happens if you have to move? The answer to this question can help you decide whether to buy or rent. If you do have to move, you will have two options: to continue to own the property, and perhaps rent it out, or sell it. One option is not unequivocally better than the other, but there is value in having the choice. In some markets, lenders will not permit you to turn your primary residence mortgage into a rental mortgage, or may increase your interest rate. Even if they will allow this, there are some cities (like parts of Amsterdam) where you might be restricted from renting a property out for a number of years after buying. In short, do your homework.

The Pros and cons buying v renting

Let us know what you think of this table. It is not an exhaustive list, and it will be a useful exercise to create your own table when you are thinking about taking the exciting step of buying a home in Europe.

In summary, if you are considering property purchase, take your time, do your homework and get the appropriate advice. You can contact us at info@blackswancapital.eu and we can advise you directly or put you in contact with mortgage and property experts in your area.