is it worth exchanging rent for financing? – Financial Education – E-Investor

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Those who live in a rented apartment are losing sleep with the IGP-M variation. The index traditionally employed in updating lease agreements has undergone a fired recently – mainly caused by high dollar. Since the beginning of 2020, it has already gained 14.40%; in the last 12 months, the variation was an impressive 17.94%.

The tenant whose contract is about to celebrate his birthday will have a ‘problem’ if the owner coldly applies the letter of the contract and uses the IGP-M to correct the rent. The IPCA, an inflation index that reflects the variation in the main prices charged to consumers, rose 2.44% in the last twelve months, and it is through this index that salaries are corrected – when they are, of course. What to do when the main expenditure of the domestic budget increases seven times that of the family income? Is it worth it to exchange rent for financing a new property?

To point out ways for the reader who is in this situation, the E-Investor talked to Marcelo Milech, CFP financial planner for Planos, Alberto Ajzental, coordinator of the Real Estate Business Development course at FGV-SP, and Michel Viriato, professor of finance at Insper.

Rent x financing

Faced with the risk of having to pay a higher rent, many tenants may be tempted to exchange the lease for financing. The experts heard by the report say that several factors must be taken into account when making this decision, but the rise in the IGP-M is not among them.

“When you buy a mortgage, you will have the same rate over the 20 or 30 years of the contract. The IGP-M variation is now high because the dollar has risen a lot, but that does not mean that it will be 18% for life. It can go up to 4%, 5% ”, says Ajzental.

To resolve the dilemma between financing a property and living in rent, says the FGV professor, the interested party needs to make a comparison between the financing rate and the cost of the lease. Considering that the lease gives the owner a monthly return of 0.4% of the value of the property, using the property costs the tenant almost 5% of the value of the property per year.

“In the past, financing had higher rates and fixed income paid well, savings paid 12% per year. It was more advantageous for the investor to apply the purchase price and lease a property. With the interest received, he paid the rent and there was a good difference left, ”recalls Ajzental.

Today, everything has been reversed: the return on fixed income is much lower and the cost of rent ends up weighing much more on the account. “The Selic rate is only 2% per year, so it is no longer worthwhile to spend 5% of the value of the asset per year on the lease. At the same time, interest on financing has never been lower. So, now it’s better to buy ”, says the professor.

To help investors understand whether renting or financing is more worthwhile, Milech uses a simplified example. In it, the financing interest is 6% per year – which gives 0.5% per month in an approximate account, without using compound interest – and the value of the property is R $ 1 million. “If the rental rate for that property is greater than 0.5% per month, that is, if the rent costs more than R $ 5,000, then it is more worth paying for the financing,” he explains.

In addition to comparing the rates of financing and leasing, it is necessary to consider that the purchase of a property in installments is a financial obligation with a very long time horizon. “This decision involves the stability of the consumer’s income and his ability to fit the benefits to this income, both the current and the future”, emphasizes the financial planner.

Professor Viriato, from Insper, thinks differently. He says that to decide between the lease and the financing, the person must think like a company. And a company would not take out a loan to finance an investment project whose prospect of return was less than that of the loan itself.

“For financing to be advantageous, the price of the property must rise more than the interest rate contracted. If you do not have the prospect that the property will rise 7% per year in ten years, then you should not finance it ”, he says. “In ten years, that amount has doubled and you will be paying for two properties.”

In this sense, he considers that leasing is more advantageous than financing, except in specific situations, such as locations with very low supply. “There are properties where the rental price is out of the ordinary, reaching 1% of the value of the property. In this case, there is no point in renting and it is better to buy financed. Or else to live further away and pay for transportation, ”he says.

How to renegotiate rent

If there is a certainty that unites the three interviewees, it is that the variation in the IGP-M should not be passed on in full to the lessee, even though the contract provides for the use of this index. “It is almost impossible that, in a context of inflation between 2% and 3%, the market sanctions a readjustment of contracts at this level [do IGP-M]. The vast majority of contracts are being renegotiated at this time, ”says Milech.

He states that the correction by the IGP-M, which is excessively costly for the lessee, would bring an imbalance between the parties to the contract. “If the owner of the property and the tenant want to establish a long-term relationship, they should not be attached to the contract so radically.”

The lease can be freely discussed by the parties – it is enough that they reach a consensus. A fairer solution may be the adoption of the IPCA as an indexer, and Milech is betting that many will choose this path, when they realize that the volatility intrinsic to the IGP-M causes too sudden oscillations. “No conscious landlord has an interest in making the tenant break,” he says.

The financial planner recognizes, however, that not all homeowners have the same sense of reasonableness, and some more radical ones may want to push the envelope and enforce the contract correction at the predicted rate. In this case, there is a great risk that the fight will end up in court.

“The risk of legalizing the contract is great. And the judge can be guided by the principle of balance between the parties to decide in favor of the lessee ”, he says.

Viriato argues that the average property price has not risen for at least five years and there is no room for them to rise again, as the economy, jobs and income will take time to recover. For this reason, there is no sense that the lease agreement should be readjusted. Instead, he understands that the value of rents should be revised downwards.

“The ball is in the tenant’s hand, and he will be silly if he doesn’t ask for a rent reduction. He must seize the moment, as he will not have another chance for that ”, he believes.

The Insper professor points out that the advantage of passing on the IGP-M variation will be quickly lost if, with that, the tenant vacates the property. In a contract with rent of R $ 2,000, for example, a 15% adjustment would increase the monthly installment amount by R $ 300, and the lessor would earn R $ 3,600 more at the end of a year.

“With two months of months of empty property, however, the owner has already stopped earning R $ 4,000. And a property can take 6 to 12 months to be rented again ”, he says.

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