Should I Rent or Buy Property in Dubai? The Answer Will Shock You!

If you are looking to rent and stay in the same apartment for the entire year, then you will probably find an apartment on one of the popular and credible rental platforms in Dubai, like Property Finder, Bayut, etc. But if you are not staying for the entire year, as many people in Dubai don’t, then you should rent from a platform called Blueground. It is essentially a short-term rental platform where we can just pick the dates when we want to stay in the apartment, and it comes out cheaper to rent by Blueground when we consider that it includes the utilities and the taxes.

However, if you are looking to buy apartments in Dubai,  then you can consider buying through an entirely trustworthy and credible buying platform, Dubai Housing. It is a beneficial source that not only helps you to make the right decisions relating to buying but also provides helpful and informational insights regarding Dubai’s real estate market.

There are various financial and non-financial factors when it comes to buying versus renting. The financial factors are simply those where:

• You will end up spending less money in terms of unrecoverable costs.
• At the end of the day, after considering everything, like opportunity cost, it will bring you to an equivalent place in terms of Net Worth or your Total Financial Position.

In terms of non-financial factors, we have things like:

Your preferences, like do you prefer to own where you have some more freedom or you perhaps have a bit more hassle like where you can't just call up a landlord to fix a problem. So, this always varies from case to case.

Let’s compare the equivalent place for renting versus buying by considering all the costs to find out which one comes out to be cheaper in terms of the unrecoverable costs over a set period.

Firstly, let’s look at the renting side. Consider an apartment in the Marina Gate building in Dubai Marina. It is renting for 150,000 AED a year, offering one bedroom with two bathrooms, spanning across an area of 763 Square feet. For buying a very equivalent place in the same building which is selling for 2.3 million AED providing one bedroom with two bathrooms and approximately the same size as the one above. 

Now, let’s calculate the costs associated. 

UPFRONT COSTS

When buying a property in Dubai, there are quite a lot of upfront fees that need to be considered.

Government fees 

This includes:

• Dubai Land Department (DLD) Fee - 4% of the purchase price + AED 580 admin fee for apartments and offices or AED 430 for land or AED 40 for off-plan.
• Property Registration Fees - For properties valued above AED 500,000, it is going to be AED 4,000 + 5% VAT, and for properties valued below AED 500,000, it will be AED 2,000 + 5% VAT.
• Dubai Land Department Mortgage Registration Fees - 0.25% of the loan amount + AED 290. 

Agency Fees

• Real Estate Agent Fees - 2% of the purchase price + 5% VAT.
• Conveyance Fees - Approximately between AED 6,000 and AED 10,000 AED. 

Mortgage Fees 

• Bank Mortgage Arrangement Fee- 1% of the loan amount + 5% VAT.
• Property Valuation Fee - Between AED 2,500 and AED 3,500 + 5% VAT.

Assume you are purchasing a property worth 2.3 million dirhams and are putting down 40% as a down payment. In the UAE, if you are self-employed, you must put down up to 40% as a down payment. It is possible to secure 20%, which is the standard for salaried employees, but for that, you would need to have a company with a minimum of seven employees to qualify for 20% as a self-employed individual. Therefore, if you are a business owner, you will most likely need to put down 40%, while as a salaried employee, you can manage with just 20%. 

UPFRONT COSTS (BUYING)

Adding up all of these fees:
40% Down = AED 915,000
The 4% Government Fee = AED 92,580 
The Agent Fee = AED 46,000 
Mortgage Fees = AED 20,312 
Other Fees = AED 4,000
Therefore, the total fees = AED 162,892 

UPFRONT COSTS (RENTING)

In contrast to buying, in renting a place, the upfront costs will be the Agent Commission, which is going to be 5% of the total rental value. In this case, with a rental value of AED 150,000, a value of AED 7,500 is the Agent Commission. Assuming you stay in the same place across this entire period, which is 5 years, then you are not going to have this every single year. If you move every single year, then you will have this extra cost every year.

RECURRING COSTS

Let's calculate the recurring cost of owning versus renting the property in Marina Gate.

Let’s assume a mortgage interest rate of 4% because that appears to be around where the interest rates are currently. 
Purchase Price = AED 7,284 a month 

The rent payment for this place at AED 150,000 a year would come out to be AED 12,500 a month. 

In conclusion, Buy (Mortgage) = AED 7,284
                       Rent = AED 12,500

The mortgage payment is much cheaper than the rent payment. But just looking at the monthly payment would be deceiving because when you buy, there are a lot of extra costs that need to be considered. 

MUNICIPILITY TAX AND SERVICE CHARGES

In Dubai, whether renting or buying a 5% municipality tax need to be paid to the government every year and that 5% is calculated on the rental value of the apartment if renting, whereas if buying, it is calculated at 0.5% of the purchase price of the property and in addition service charges qalso need to be paid to the building or the community.

For this particular building in Dubai Marina, the service charge is AED 14.4 per square foot.
So, Buy -  Service charges on an apartment of 764 square feet + 0.5% municipality = AED 1,875.13 a month
In the case of Renting, the 5% Municipality Tax = AED 625 a month

In both cases, whether buying or renting, there are going to be monthly utilities that must be paid. But in both cases, these are going to be the same value. 

In the case of buying, there is also the consideration of repairs, so we are assuming that it will be around 1% of the property value, which comes out to be AED 1,916 a month.

In the UAE, when you own an apartment, you also have mandatory life insurance if you are taking out a mortgage, and that will be around 0.6% of the mortgage value per year and month. In this case, it comes out to be AED 6,925 a month.

Total monthly payment, i.e., the total cash flow out of the bank account every single month.

Buying = AED 11,768
Renting = AED 13,125 

But when buying on mortgage, there will be unrecoverable cost, i.e., not all of that is going to be interest because some of that is going towards principal, which is still your money.

Buy 

So, on a 25-year mortgage, over 5 years on this kind of loan,
Total Principle after 5 years = AED 180,128
Average Principle = (AED 3,002.14) a month
Cash Outflow = AED 11,768.30
Net Monthly Unrecoverable Cost on Average over this period = AED 8,766 a month 

Renting

It will still be the same value as before = AED 13,125

So, over this entire period, you are paying much less every month in terms of unrecoverable cost in buying as compared to renting. 

Also, we need to consider that when you bought the place, you had a lot of unrecoverable costs at the beginning, which we had already calculated above and which came out to be AED 162,892. On adding all of these unrecoverable costs every month for 5 years for buying plus the cost in the beginning, we get a total value of costs.

Buy 

Fixed Costs = AED 162,892.50
Total Recurring Costs over 5 years = AED 525,969.70
Total Unrecoverable Costs = AED 688,862
11,481.04 per month 

Rent 

Fixed Costs = AED 7,500
Total Recurring Costs over 5 years = AED 787,500
Total Unrecoverable Costs = AED 795,000
13,250 per month

So, in the case of this apartment, with the assumption that you are staying in a place for 5 years with a 25-year mortgage and a mortgage interest rate of 4%, you pay less over this entire time of renting.

Also, instead of paying all of this money in down payment and fixed cost in the beginning, you could have just invested that same amount of money in the S&P 500, which would have given a lot of extra investment returns that you do not get in the case of buying.

So, we can assume conservatively that the S&P 500 is going to keep increasing at a rate of 7% per year on average.
Over these 5 years, in the case of Renting,
Total Unrecoverable Costs = AED 795,000
Down Payment + Fees Invested = (AED 374,637.38)

In the case of Buying

As you are paying less in cash flow every month, you also have a lot more money available to invest into the stock market every month compared to renting. So, when we take the difference between the net cash outflow and then invest that difference into the stock market over this entire 5-year time period, that would give us extra investment returns.
Total Unrecoverable Costs = AED 688,862.20
Extra Cashflow Invested = (AED 5,698.14). 

This cancels out some of the extra investment returns you would earn on investing the deposit plus the fixed cost in the case of renting. 

So, when we consider these assumptions, net wealth would be higher in the case of renting. In Dubai, there is not much historical data about property prices because Dubai has only became super popular in the last 5 to 10 years and the property index in the past few years, have had some crazy returns of more than 10% a year in property appreciation. 

Let's say we change the stock market investment return to 10% and the property price appreciation to only 1%. Now, suddenly after 5 years we will be much better off renting and the more we change this number at the top on the years that we are going to stay in the place. Assume that you are going to stay for 10 years then you are more better off in the case of buying.

Another parameter to consider is that the thing with renting is that just because you are paying 150,000 a year now for this apartment does not mean that the same rent is going to stay over for the next 5-10 years. Most likely these rents are going to keep increasing. 

In Dubai, a reasonable estimate of the annual rental increase might be 5% or could be more than that which would mean that your average monthly payment in terms of your rent is not AED 12,500 but over the 5 years it would start at AED 12,500 and end up at a much higher price which would lead to an average rent payment of around AED 13,800 which will lead to again a much higher overall cost at AED 877,786 and a net effective cost or profit over the period at the end of the day of AED 503,149.

From the above examples and statistics, it is evident that the buying side holds more weightage as compared to the renting side. Moreover, when we compare Dubai to many other top tier cities in the world like London, New York, etc, the relative cost of buying in Dubai is actually much lower than in many other places.

A COMPARATIVE ANALYSIS BETWEEN LONDON AND DUBAI 

We can see that renting a one-bedroom apartment on average in the City Centre in London is around 24.6% more expensive as compared to Dubai. Once we look at price per square meter to buy an apartment in the City Centre in London this is almost 200% more. So, while its more expensive in both cases. In London, buying is significantly more expensive compared to renting. Whereas it is more beneficial to buy in Dubai as compared to a lot of the places.

Inferred from the above informational data and comparisons, we can say that it is better to buy properties in Dubai rather than renting, however, still it also depends on various other parameters such as the preferences of the people. Moving suddenly to Dubai may make it difficult for some people to decide the area, community and everything where they want to live and buy their house, so many people do prefer to rent houses initially and then over a period of time decide to buy their own residential properties.