Cost-Benefit Analysis: Buying vs. Renting (with 700 Reais Extra Loan Payment)
This analysis compares the financial outcomes of buying versus renting an apartment in Brazil over two years, considering an additional 700 reais/month loan payment. We refine previous calculations and address key assumptions.
Option 1: Buying the Apartment
1. Loan Details (Revised with Extra Payment):
- Original Loan: 110,000 reais
- Annual Interest Rate: 16.815% (approximately 1.4013% monthly)
- Original Loan Term: 96 months (8 years)
- Original Monthly Payment: 2,083.33 reais
- Extra Monthly Payment: 700 reais
- Total Monthly Payment: 2,783.33 reais
- New Loan Term: Using an amortization schedule, the loan is fully paid in approximately 58 months, which is under 5 years.
2. Costs Over Two Years:
- Down Payment: 160,000 reais
- Closing Costs (Purchase): 8,100 reais (3% transfer tax)
- Loan Payments (24 months): 2,783.33 reais/month * 24 months = 66,799.92 reais
- Property Taxes (IPTU): Assuming an average IPTU of 0.5% of the property value per year, this is 0.005 * 270,000 reais = 1,350 reais/year. Over two years: 2,700 reais.
- Maintenance & Repairs: Estimating 0.5% of the property value per year for maintenance: 0.005 * 270,000 reais = 1,350 reais/year. Over two years: 2,700 reais.
- Condominium Fees: Assuming an average of 400 reais/month: 400 reais/month * 24 months = 9,600 reais
3. Sale Proceeds:
- Sale Price: 350,000 reais
- Selling Costs: Assuming 4% for the agent’s commission and 1% for other costs (like paperwork): 0.05 * 350,000 = 17,500 reais
- Capital Gains Tax: In Brazil, there is no capital gains tax on the sale of a primary residence if it’s the only property sold within a five-year period, and you have lived in it for some time (the specific time may require specific advice to confirm the period). Assuming this exemption applies, the tax is 0 reais.
- Outstanding Loan Balance (after 24 months): Using a loan amortization schedule with the extra payments, the remaining balance is approximately 68,420 reais.
- Net Proceeds: 350,000 reais (sale) - 17,500 reais (selling costs) - 68,420 (loan balance) = 264,080 reais
4. Total Buying Costs and Net Gain:
- Total Outflows: 160,000 + 8,100 + 66,799.92 + 2,700 + 2,700 + 9,600 = 249,899.92 reais
- Net gain: 264,080 - 249,899.92 = 14,180.08 reais
Option 2: Renting the Apartment
1. Direct Costs:
- Total Rent Paid (24 months): 1,600 reais/month * 24 months = 38,400 reais
- Rent Increase: Assuming an annual increase of 5%: 1600 * 1.05 = 1,680 reais. Total rent: (1,600 * 12) + (1,680 * 12) = 19,200 + 20,160 = 39,360 reais
2. Investment of Savings (Illustrative Scenarios):
- Initial Investment: 160,000 reais (the amount not used as a down payment)
- Monthly investment: 2,783.33 (buyer´s payment) - 1,600 = 1,183.33 Reais, for the first 12 months
- Monthly investment: 2,783.33 (buyer´s payment) - 1,680 = 1,103.33 Reais, for the following 12 months
We’ll consider various investment return scenarios to illustrate potential outcomes, but emphasize that these are not guarantees:
| Annual Return | Initial Investment (after 2 years) | Monthly savings (after 2 years) | Total Value (after 2 years) | Net Gain (Total-Initial 160,000) |
|---|---|---|---|---|
| 4% | 173,056 | ~ 28,882 | ~201,938 | ~41,938 |
| 6% | 179,776 | ~ 29,291 | ~209,067 | ~49,067 |
| 8% | 186,624 | ~ 29,934 | ~216,558 | ~56,558 |
3. Net Gain After Paying Rent:
- We subtract the total rent paid (39,360 reais) from the “Total Value” in each scenario.
- For example, with a 6% annual return: 209,067 - 39,360 = 169,707 reais. The Net Gain is 169,707 - 160,000 = 9,707 reais
Comparison and Conclusion
| Buying | Renting (6% Return Example) | |
|---|---|---|
| Net Gain/Loss | +14,180.08 reais | +9,707 reais |
| Other Factors | - Builds equity, - Subject to property value changes, - Responsible for all maintenance and repairs, - Less liquid | + Greater flexibility, + No maintenance responsibilities, + More liquid, - Dependent on investment performance, - No equity built |
| Main Risks: | Property market decline, Interest rate fluctuations | Investment underperformance |
Key Assumptions:
- Capital Gains Tax Exemption: Assumes the buyer qualifies for the primary residence exemption.
- Selling Costs: 5% total (4% agent commission, 1% other).
- IPTU: 0.5% of property value per year.
- Maintenance: 0.5% of property value per year.
- Condominium Fees: 400 reais/month.
- Rent increase: 5% annually
- Investment Returns (Renting): These are hypothetical and not guaranteed.
- Fixed Loan Rate: The loan interest rate is fixed.
Final Answer:
Based on this analysis, buying the apartment appears financially more advantageous than renting, yielding a net gain of approximately 14,180 reais over two years, provided the capital gains tax exemption applies. Renting, even with optimistic investment returns, generates a smaller net gain (e.g., 9,707 reais at a 6% return).
However, the critical factor is the capital gains tax exemption. If the exemption does not apply, the buyer’s net gain would be significantly reduced by the 15% tax on the capital gain (71,900 reais * 0.15 = 10,785 reais). In that case, buying´s net gain would be approximately: 3,395 reais.
Also, the renting scenario is highly dependent on achieving the assumed investment returns. Lower returns would significantly favor buying. The choice also depends on individual risk tolerance: buying involves property market risk, while renting involves investment risk.