Before when you would buy a house, you would own it for a lifetime. Nowadays, personal situations and different work phases cause many to be forced to move from one place to another.
For this reason, when it is time for the family to grow and it grows more than expected, there is a need to change properties. If at that time we still rent, we will have to decide between looking for a new property to rent or to buy and own a property. However, the situation changes if we have already acquired a house and we need to move. What is better in this situation? Sell the house and buy a larger one, or rent out our property and rent another? We will clarify it with an example.
Sell the house and buy a new one
Ana bought a house a few years after starting to work. She lived alone and decided that a two-bedroom apartment in Madrid would be enough for her. However, over the years she ended up getting married and had a daughter. Now there are three people in their family unit, and they are waiting for their next child. Therefore, Ana and her family are looking for a new home, which will have to be close to their house, because their daughter’s school is there. With the prices that currently exist in the housing market, Ana could sell her apartment (which she has already finished paying) for around 180,000 euros. On the other hand, right now the property she likes costs 100,000 euros more than her current home, i.e. 280,000 euros.
If Ana sells her house and decides to buy a larger one, she would have to request a mortgage of 100,000 euros, since she would obtain 180,000 for the sale of her first home. However, buying a new apartment requires several expenses. In this case particularly, the amount of expenses related to the purchase of the new home would amount to almost 30,000 euros, which are broken down into: 28,000 euros for taxes (10% of the price of the property), about 830 for the notary, 590 for registration and 450 for the agency. In addition to this, you will have to face the costs of setting up the mortgage, which will be more than 800 euros (305 euros for appraisal, 500 for opening commission and 27 euros for registration verification).
The interest for the loan will also have to be added to this (mortgage at a fixed rate of 1.7% at 15 years), which amounts to more than 13,000 euros. Also, the sale of the house will not be free either and Ana must pay the municipal capital gain, which will vary depending on the area in which the property is located and the number of years it has been owned. Of course, as you will invest the money from the sale into a new house, you will not have to pay personal income tax.
Rent the house and leave for rent
But what happens if Ana opts for the rental option? As she and her family want to continue living in the same area, but in a larger home, the rental fee will be greater than what they will receive for renting their own home. Therefore, Ana could rent her apartment for 800 euros, while the rental of the new one will cost 1,300. This means that, she will need to contribute 500 euros out of pocket every month. On the other hand, the mortgage loan fee for this specific case would be about 630 euros. In other words, in addition to all the expenses of the sale of her previous apartment and the purchase of the new one, the monthly instalments of the mortgage would also be more expensive than those of the rent.
With regards to cost, renting seems to be the more favourable option for Ana. However, in order to know if the operation will be profitable in the long term, it will be necessary to take into account the revaluation of both homes in the future which, obviously, would be greater in the new property (although you would have to subtract everything spent during the purchase and interest on the mortgage).
In this case, if we estimate an annual revaluation of 2% for both properties, after 20 years the first will have a value of 252,000 euros and the second of about 342,000 euros (after subtracting mortgage interest, purchase expenses and municipal capital gain from the sale of the first property).
But what would have happened if instead of buying that second property she had invested the amount spent on the sale during those 20 years? If she had put that equivalent (about 50,000 euros) in the stock market without making extra contributions, Ana could have obtained about 118,000 euros by adopting a moderate profile. This amount, added to that of her old home, would give you a total value of about 370,000 euros. So, in this case, it would have been better to rent. Of course, if Ana had adopted a conservative profile so as not to incur risks, the profits from her investments would have been around 60,000 euros that, added to the value of her home, would give her about 312,000 euros, so the option of selling and buying would have been more profitable.