My family has lived in Dubai for 6 years now, and we’ve been renters since day 1.  This was mainly due to the arrangement of our salary & benefits paid by our company … but this arrangement has recently changed and we’re now in the process of evaluating if we should continue to rent or buy or primary residence in Dubai.

 

There’s a lot to consider when deciding to buy or lease your primary residential property, with one of the primary factors being the costs associated with each option, which we’ll dive into below.  But before taking a deep-dive into the cost analysis, let’s take a look at the various pros and cons of renting & buying to set the stage.

 

Pros of Renting

There are several benefits to renting, but if I had to summarize it in just 1 word, then it would have to be flexibility.  Not owning your residence gives you the option to move as often as you need or want to.  If your employment or personal situation suddenly changes and you need to leave the country quickly, it definitely helps to not have to worry about dealing with a property you own.  In that case, you’d have to sell (maybe at a loss depending on market conditions) or figure out how to find a tenant, all while you were also dealing with your life-changing circumstances and an international move.  Renting gives you peace of mind that if your situation changes (as they often do in Dubai) that you can roll with it, without too many headaches.

 

The other main pro of renting is the low level of responsibility for the property.  You are not on the hook for major maintenance issues.  You do not have to pay owners association fees or dues.  You do not have to pay for structural insurance.  You do not have to deal with the local authorities for registration and pay the real estate fees.  You get to walk away whenever you need to (assuming you’ve fully paid your rent) with no further commitments.

 

Cons of Renting

There are two main drawbacks to renting … one is financial and the other is lifestyle driven.  The primary financial issue is that it can feel like you’re just flushing your money “down the drain” every time you pay a rental check.  You don’t own the property, so you’re just paying for the time to stay there … like a hotel!  (In fact, I often like to calculate how much rent I’m paying per day and then compare it to local hotel rates.  Maybe I should just move out and stay in a hotel full-time?!)  To be fair, I’d say you’re not really wasting your money when you pay rent.  In fact, you’re paying for a valuable service with the specifications that you chose!  Remember, the rental market in Dubai is huge … neighborhoods, villa/apartment, unit size, developer, quality, view, age, etc, etc, etc … the choices are endless.  So my point is, don’t feel bad about paying rent.  That said, you should be aware that rental rates may rise from year to year, so you need to be prepared for that.  Check the links below for the official Rental Increase Calculator from the Dubai Land Department.

 

The other main con of renting is that you never feel like the place where you live is really “your” home.  I mean, you don’t own it, so it’s not yours!!  You can’t decide to do any major renovations or redecorations without discussing all the details with the landlord first.  And you have to return the property at the end of your lease in the same condition as when you first moved in.  It’s also possible that when your current lease term is expired, your Landlord can give you a 12-month advance notice of eviction if they intend to move into the property.  So it’s easy to see why it never quite feels like “home.”

 

Pros of Buying

When you decide to buy, you are buying all the freedom needed to modify the landscape or design the interior of your home to your liking.  In other words, you have full creative control when a property becomes your own … it really is “your home!”  This is a big motivator for many people, as you have a sense of autonomy and ownership … you’re the King & Queen of your own Castle and no-one can tell you what to do!

 

The other big upside of owning is that every monthly payment you make goes towards paying off a portion of your mortgage principal, and you are building equity in your home.  If you decide to sell your home in the future, it’s possible that you may get a good deal and recognize a gain, because property values tend to appreciate over time (warning on this point below!).

 

Cons of Buying

The biggest cons of buying your own residence in Dubai are certainly financial in nature.  You have to budget a huge amount of approximately 35% of the purchase value of the home for upfront payments (that’s a ton of cash)!  And remember that there are a lot of on-going expenses associated with owning a home that you should include in your financial forecasts and assumptions (insurance, maintenance, fees, etc).  If you have to move urgently, you may not be able to put your home out in the market as quickly as you’d want.  Resale risk is important to consider because of various economic factors that may affect the property’s value.  You never know where the real estate market is headed in Dubai, because it certainly does have cycles of ups and downs … so just be prepared to hold in a down market!

 

Here’s a helpful summary graphic of all the factors discussed above.  Please share this with your friends on social media!

 

 

Ok, so now that we have those considerations out of the way, let’s dive-in to the financial details and analysis of Renting vs Buying…

 

The Costs of Renting vs Buying in Dubai

 

Let’s start with Renting, which is way more clear cut…

The cost of renting a residential property is considerably less than the cost of purchasing property (even in the first year, excluding the down-payment).  Here are a few things to keep in mind:

  • You should negotiate for the maximum number of rent cheques possible.  A few years ago, basically all Landlords required payment for the entire year upfront in 1 cheque, but now the market is changing and many more Landlords are willing to accept 2, 4 or even more cheques.  This is important because it keeps cash in your pocket longer and lets you manage the timing of your cash flow much more effectively.  I recommend to start the discussion with a “monthly” rent cheque and if they don’t accept that, then negotiate from there.
  • In addition to the rental fee, you need to budget for the Broker’s commission, which is usually 5% of the total rental amount of the lease.  Certain Brokers charge a minimum sum, which may be more than 5% on lower-value leases.  The commission is usually payable upon signing the tenancy agreement.
  • Although not an actual cost (because you get it back later), you need to budget for a security deposit of at least 5% of the annual rent, which is payable to and held by the Landlord for the duration of the lease and refunded when the contract is terminated and the property is inspected for damage.  The lease agreement usually makes provision for normal wear and tear and the refund of the deposit cannot be retained by the Landlord under such circumstances.
  • A fee of 215AED is required to be paid tо the Dubai Land Department fоr the registration of the lease agreement (tenancy contract) on the Ejari system, which is a regulatory requirement before utility services will be delivered to the property.
  • You have to put down a refundable Dubai Electricity and Water Authority (DEWA) deposit of 2,000AED for apartments and 4,000AED for villas which must be paid upfront when you connect the utilities for your residence.
  • Tenants are also charged 5% of the annual rent as a housing fee on your utilities, which is prorated over the period of the lease and charged to the tenant’s monthly DEWA bill.
  • You should expect to pay for all minor maintenance issues below a value threshold, which is typically 500AED per incident.
  • Finally, you should consider Rental Contents Insurance to protect all of your personal effects inside your rented residence. (Protect yourself from fire or other loss!!)

 

Now, what about Buying?

When you’re planning to buy a residential property, you should budget for significant initial up-front costs.  Here’s a summary of what you can expect to pay to buy your home:

  • The first cost to consider is the required down-payment for your home, which is set by Dubai Land Department at 20% of the property purchase price for UAE Nationals and 25% for Non-UAE Nationals.
  • In addition, you’ll need to pay the Broker’s sales commission, which amounts to 2% of the purchase price.
  • Now you have to pay the fees at the Dubai Land Department for property Valuation (fixed at 3,000AED), Title Registration (4% of property value), Administrative (fixed at 540AED) and Knowledge (fixed at 10AED).  The law states that the registration fees are payable equally by the purchaser and the seller unless agreed otherwise.  However, in most cases the sellers insist that the purchaser pay the full 4%.  The value of the property is not necessarily the same as the purchase price, and the DLD reserves the right to charge the registration fee on either the purchase price or a valuation of the property as determined by the DLD, whichever is higher in most cases.
  • If you are purchasing an off-plan property, you will also be liable to pay further registration fees to the Registration Trustees, who are the appointed representatives of the DLD who attend to the registration process on behalf of the DLD.  An amount of 5,000AED is payable if the property value equals or exceeds 500,000AED and 3,500AED where the property value is less than 500,000AED.
  • You have to put down a refundable Dubai Electricity and Water Authority (DEWA) deposit of 2,000AED for apartments and 4,000AED for villas which must be paid upfront when you connect the utilities for your residence.
  • Owners are also charged 5% оf the equivalent annual rent (as determined by the RERA Rental Index) as a housing fee on your utilities, which is prorated over the year and charged to the owners monthly DEWA bill.
  • If you are part of a managed Community, then there are likely to be mandatory annual Community Service Fees which are payable to the Developer.  Be sure to do some research on this in advance and know how much it will cost you and what the scope of services that the Developers provide are.
  • And don’t forget to budget for maintenance costs, which are now your responsibility as the property owner!

 

Unless you can pay cash for the whole property (whoa!), you’ll have to consider mortgage costs:

  • When you apply for a mortgage, you will typically pay an application fee of 1,000AED plus 1% of the sum of the Mortgage Principal amount as a processing fee.
  • You can expect to pay 0.25% of thе Mortgage Principal amount to the DLD as the mortgage registration fee, together with a nominal Knowledge fee of 10AED.
  • The banks usually also require annual Property Insurance, as well as Life Insurance (on the household primary breadwinner) to cover the outstanding balance of the loan.
  • Your Equated Monthly Installment (EMI) … monthly mortgage payment will be calculated in advance but may fluctuate as interest rates fluctuate.  It may be possible for you to get a loan under 4% right now, but with rising interest rates, I’d recommend that you forecast for an interest rate of 4.25%.  Check out the calculators below to get a sense of what your monthly mortgage payment might be.

 

A few quick facts about Mortgages in Dubai…

I’ll cover home mortgages in more detail, in another post, but here are some quick facts for reference:

  • Mortgage principal value equal to 80% of the home purchase price for UAE Nationals and 75% for expats
  • Maximum loan term is 25 years
  • Different banks offer different variable interest rates … a conservative estimate for financial models is 4.25%
  • Eligibility for monthly payments on the sum of all loans (mortgage, car, personal, credit card) is capped at 50% of your income

 

A quick reminder that regardless of if you rent or buy, you should also budget for Moving costs, which can run anywhere from 1,500 to 5,000AED.  During our last move, we paid 4,000AED for a 10 man team to move the contents of our 3 bedroom residence (includes living room, dining room, kitchen appliances, washer/dryer).

 

So how do you decide whether to rent or buy?!

A quick check you can do as a first-pass is to calculate the Price to Rent Ratio which represents the number of years of rental payments that would be required to buy the same or similar property.  Just take the purchase price of the property (exclude the fees for simplicity) and divide it by what you expect the annual rent would be for that or an equivalent property.  Then the decision guideline suggested by US-based real estate marketplace Trulia for this ratio is…

  • 1 – 15 … Much better to buy than rent
  • 16 – 20 … Typically better to rent than buy
  • 21+ … Much better to rent than buy

 


 

WOW … that’s a lot to think about.  Feels kind of over-whelming huh?  I agree.

 

To help with this, I’m working on developing a decision-making worksheet where you can include all the relevant details and can compare the forecasted costs of renting vs buying.  Check back here to get the resource when it’s posted!

 

In the meantime, please check out this decision-making tree which provides some helpful guidance on whether you might want to rent or buy.  Of course, the final decision will be based on the details of your situation and this is just a guide for your consideration.

 

I hope this post was helpful to you and provided some food for thought about the key considerations in the rent vs buy decision, and what you can expect the costs to be.

 


As always, check out these additional resources below…


Matt Nobles is the founder of Dubai Personal Finance.  In addition to being a certified Personal Finance Education Instructor, Matt also has 10 years of Corporate Finance experience, working for a large multi-national company.  Matt is passionate about helping people like you learn how to make wise money management choices, so you can achieve Financial Independence and focus on living the life you’ve always wanted.


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(Disclaimer: This article contains information for your reference and explains options you may have, but it is not intended to be specific advice or a personal recommendation. DubaiPersonalFinance.com exists to provide general guidance and education, but your situation may vary from the one discussed here, so please seek a licensed professional for tax, legal, financial planning or investment advice.)

 

Good luck and please comment below on any of the information included in this article, or with some feedback about your own experience with the rent vs buy decision!