What is more worth it: buying property or renting and investing?

The decision between purchasing your own property through financing or choosing to rent while investing the available capital is one of the most significant in an individual’s financial life. The question of what is more financially worthwhile, buying a financed property or renting and investing, does not have a single answer, as it depends on a complex interaction of economic variables, market conditions and personal objectives. This article presents a technical analysis of the financial factors involved in each choice, providing a framework for informed and rational decision making.

Analysis of the costs involved in purchasing and renting

For an accurate comparison, it is essential to break down and understand all the costs associated with each modality. The analysis should not be limited to the comparison between the financing installment and the rental value.

In the case of purchase of a financed propertycosts include:

• Input value: Generally between 20% and 30% of the value of the property, representing a significant opportunity cost, as this capital could be yielding financial investments.
• Real estate financing: The total amount paid at the end of the contract is substantially greater than the value of the property due to the Total Effective Cost (CET)which includes not only the nominal interest rate, but also mandatory insurance (Death and Permanent Disability – MIP; Physical Damage to the Property – DFI) and administrative fees.
• Transaction costs: They include the Real Estate Transfer Tax (ITBI), which varies by municipality, and notary fees to register the deed.
• Ongoing expenses: The owner bears the Urban Property and Territorial Tax (IPTU), condominium fee, maintenance costs and possible renovations.

On the other hand, rent and invest the difference involves the following financial components:

• Monthly rent: Direct cost for housing. The value is generally adjusted annually by an inflation index, such as the IGP-M or the IPCA.
• Rental guarantee: It can be a security deposit, surety bond or guarantor. The bail insurance represents a non-refundable annual cost.
• Condominium and IPTU: Depending on the contract, these expenses may be the responsibility of the tenant.
• Investment potential: The main financial advantage lies in the possibility of investing the amount that would be used to enter the property and the monthly difference between the cost of financing and rent.

Determining factors in financial comparison

The decision leans one way or the other depending on a set of macro and microeconomic variables. The careful analysis of these factors is what determines the most financially advantageous choice at a given moment.

• Interest vs. interest relationship return on investments: This is the pillar of analysis. If the net rate of return (after inflation and taxes) of an investment portfolio is consistently higher than the Total Effective Cost (CET) of real estate financing, the option to rent and invest tends to be more advantageous. In a scenario of low interest rates for financing and high profitability in the capital market, the balance tips towards investment.
• Property appreciation potential: The purchase becomes more attractive if there is an expectation of real appreciation of the property (above inflation) that exceeds the interest cost of financing and the returns from alternative investments. However, this appreciation is not guaranteed and depends on factors such as location, urban development and the real estate market cycle.
• Opportunity cost: The capital tied up in the down payment and installments of a property has an opportunity cost, which is the income that could be obtained if that money were invested. This factor is often underestimated in purchase analysis.
• Flexibility and mobility: Although it is a qualitative factor, flexibility has financial implications. Renting offers greater geographic mobility, which can be crucial for professionals looking for opportunities in other cities or countries, avoiding the high costs and bureaucracy of selling a property.

Scenario simulation: a numerical comparison

To illustrate the analysis, consider a property worth R$500,000.

Scenario 1: Financed Purchase

• Entry (20%): R$100,000
• Financing: R$400,000 in 360 months (30 years) with a CET of 11% per year.
• Approximate monthly installment (SAC Table): Starts at around R$4,777 (amortization + interest).
• Additional costs (ITBI, registration, etc.): Approximately R$20,000.
• Monthly expenses (condominium, IPTU): R$800.

Scenario 2: Rent and Investment

• Rent of similar property: R$2,500 (0.5% of the property value).
• Monthly expenses (condominium, IPTU): R$800.
• Initial investment: R$120,000 (input amount + transaction costs).
• Monthly investment: The difference between the financing installment and the rent (R$4,777 – R$2,500 = R$2,277).
• Annual net return on investment: 8% per year (above inflation).

In this simulation, after 30 years, the buyer will have a paid-off property, whose future value will depend on appreciation. The tenant/investor, in turn, will have accumulated a financial asset of more than R$4.5 million, considering the profitability of the initial and monthly contributions. The final result will critically depend on the rate of appreciation of the property versus the rate of return on investments. If the property’s appreciation is higher than the portfolio’s profitability, the purchase may prove to be more advantageous.

Objective financial analysis demonstrates that there is no universal answer. The decision between buying or renting and investing is a personal equation, whose main variables are the interest rate on financing, the expected profitability of investments, the potential for real estate appreciation and the individual’s time horizon. The most prudent choice is one based on personalized calculations, which consider current market conditions and one’s own financial objectives, avoiding decisions based solely on emotional factors or social conventions.