Rent v. owning: A couple of case studies in Ecuador

ecuador map

If you’ve been reading the last few posts focused on my recent trip to Ecuador, you know one of my objectives was to take a look at property for sale both in Cuenca and in and around Bahia on the coast.  I like looking at property, it is an excellent way to get a feel for a place and we are seriously considering relocating in a couple of years.  All good reasons, and the fact that it gives me material for this post is just icing.

Back in February of this year I presented my way of running the numbers in the rent v. own analysis:  http://jlcollinsnh.wordpress.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/  I like this approach better than others because it is simpler and it focuses on evaluating the choice you are actually making rather than some academic exercise designed to prove a point.

If you haven’t already, you might take a moment to give it a read as it lays out the thinking behind the analysis of a couple of Ecuadorian properties to follow.  Go ahead.  I’ll wait…

OK.  If I’ve learned anything from putting up that post it is that people have very strong emotions wrapped around their personal decision to rent or buy.  In it I was candid about my own inclinations.  I have a bias towards renting.  As soon as I can unload the house I own, I’ll happily go back to the carefree and blissful renter’s life.

But I’ve also owned at various times in my life, so I’m not unsympathetic to the appeals of having a place you can call your own.  While we were raising our daughter the school system, lifestyle and neighborhood we wanted were all most easily accessed by owning.  Now those days are past and my wandering spirit is getting antsy.   I’m not a putting down roots kinda guy so the flexibly of renting has an outsized appeal.  For others putting down roots is vitally important and so owning has, for them, its own outsized appeal.

Regardless of where your personal inclinations lie, I think it is vitally important to run the numbers.  At least if achieving wealth is important to you.  If you are going to own a house, or not, it behooves you to know what the financial implications are.

For instance, in my case, running the numbers tells me that owning my house costs a $5-8000 annual premium to renting the apartment I have my eye on.  That’s steep by any measure.  Given that the apartment is the far more appealing living arrangement to me, my path is clear.  But so far, the market has kept me trapped.  This, too, is an important lesson:  It is almost always far easier to buy than to sell.  Houses, cars, appliances….just about anything. Something to keep in mind when the buying siren’s song is calling.

While renting holds more appeal for me than owning, and my guess is that once this house is sold I’ll never buy again, never say never.  I am first and foremost a financial guy.  If running the numbers in some future situation points to a fiscal owning advantage, I may yet again pull the trigger.  Living in Ecuador may present just such a scenario.  For the purposes of the analysis below I’ve used the asking price for both sales and rental.  Negotiations would lower both, but we can assume in proportion.  Let’s take a look.

Property #1.  Cuenca Condo: 2-bedrooms, 2.5 baths.  Veranda.  ~1500 square feet.  $162,000 to buy/$800 per month to rent.

tomebamba river

Tomebamba River View

This is a beautiful property in a solid brick building about two years old.  Finishes are top quality and it comes furnished, also to a top quality level.  Needs nothing, as they say.  It is on the second floor and the veranda provides a lovely view across the street to the river and the park that runs along side it.  Using the formula from my February post:

– $5670 opportunity cost. This is the 3.5% dividend our 162k could be earning in VGSLX.  Opportunity cost is frequently overlooked and is often the largest cost of all.  If you really want to know what the numbers have to tell you, its inclusion is critical.  What it is and why I use VGSLX as my proxy are both explained the February post.

– $1252 in annual cash expenses comes from these:

  • Heat and AC costs: 0.  Buildings in Ecuador don’t have heat or AC.  Neither are needed.
  • $1128 HOA (home owner’s association) fees @ $94 per month.
  • $124 real estate taxes per year.  No, I didn’t omit any zeros.

–$6922 total annual cost of owning and operating the condo.

v. $9600 annual rent @ $800 per month =

– $2678 annual premium to rent.  Advantage:  Owning.

Bahia

Property #2 is in one of those tall white buildings above

Property #2.  Bahia Condo: 3-bedrooms, 3 baths.  Veranda.  ~1600 square feet.  $145,000 to buy + $10,000 to renovate/$800 per month to rent.

This condo is on the 4th floor of a solid brick building about 16 years old but the finishes are poor quality and showing their age. It comes serviceably furnished, but I’d want to upgrade were I to live in it.  As a rental you could get by, but upgrades would bring more rent and the rental figure I use below assumes the upgrades.  It faces the Pacific Ocean and the view from the veranda is pretty spectacular.

– $5425 opportunity cost. This is the 3.5% dividend our 145k purchase price and 10k estimated renovation cost could be earning in VGSLX.

– $1825 in annual cash expenses comes from these:

  • Heat and AC costs: 0.  Buildings in Ecuador don’t have heat or AC.  Neither are needed.  Temperatures in Cuenca range from about 60-80F and on the coast from 70-90F.
  • $1200 HOA (home owner’s association) fees @ $100 per month.
  • $500 special assessment for painting the building.  As this is a 16-year-old building my guess is these ‘special’ assessments will become a regular thing.  In Ecuador HOAs tend not to build contingency funds from the monthly dues.  Special expenses are a handled with special assessments.
  • $125 real estate taxes per year.

–$6750 total annual cost of owning and operating the condo.

v. $9600 annual rent @ $800 per month =

– $2350 annual premium to rent.  Advantage:  Owning.

Two things immediately leap out to me:  The lack of HVAC costs and the super low real estate taxes.  Looking at the numbers we ran last time on my house v. renting, these alone go a long way toward tipping the rent v. own balance. My real estate taxes in NH are over $8000 annually and heating oil runs over $2500 a year.

So clearly the first thing you should do upon arrival in Ecuador is buy yourself a home, right?  Well, lots of gringos do exactly that, but your pal jlcollinsnh is going to suggest you carefully consider a few things first.

1.  The “gringo tax.”  Like many overseas retirement havens, the gringo tax in Ecuador is a very real, if unofficial, thing.  Now, if we are talking a $2 taxi ride and the driver is asking for 50 cents more than he’d charge a local, my advice is don’t sweat it.  Pay the man and feel good he has a bit more to bring home to his family.  If we are talking about a 150k house, I get a bit more hard-nosed.

2.  There is no MLS (Multiple Listing Service) in Ecuador.  You’ll get no listing sheet with the price clearly shown. The price is whatever the realtor or owner tells you it is and that number may be, in fact very likely is, different than what they told the last person or will tell the next.  In my short time looking I’ve had one realtor tell me an apartment cost 145k and another 90k for the same place.  With a couple of new American friends I looked at a rental for $750 per month.  It had been offered to friends of theirs two weeks earlier for $950.  One gringo owner told our realtor he was only interested in selling at “the gringo price, not the local price.”   Purchase price or rent, it is very difficult to determine the actual market value and very easy to overpay.  Of course, a mistake made renting is lots easier and cheaper to correct.

Cuenca apartment

Nicely furnished Cuenca Apartment.  $750 a month for us, $950 for the people who saw it before us.

3.  There is no set way or commission percent realtors get paid.  It depends on the deal they strike with their seller and/or buyer.  Maybe the seller pays the commission.  Maybe the buyer.  Maybe both.  In some cases the seller will set the price and the realtor’s commission is whatever more she can sell the place for.  If the seller wants 100k and you can find a gringo just off the boat to pay 170k, 70k is your commission.  By the way, don’t think for a moment dealing with gringo sellers and gringo real estate people will avoid these situations.

4.  You shouldn’t be buying property in any market you don’t first understand.  Because there is no MLS, any given realtor will only be aware of the few properties available to which they are personally connected.   No one person can or will show you everything available at a given time.  To really understand this market takes much more time and effort than here in the USA.

5.  Ecuador is a 3rd world country.  As such dramatic political changes can come swiftly.  If push ever comes to shove, no politician will favor the needs and interests of expat property owners.  As one expat told me, “While things are great now, we are only ever one election away from a presidential order expelling all foreigners.”  From what I can tell, in Ecuador that’s highly unlikely.  But I’ve known enough people over the years, my wife included, who have fled revolutions with only the clothes on their back that I don’t  take it lightly either.

6.  Even the most adamant proponents of homeownership concede to have a chance of making it work financially you need to live in the place at least five years.   Ecuador is no different.  Yet I heard several stories of gringos who arrived, bought and three months later were back in the USA having decided the reality didn’t match their dream.  And stuck trying to sell.

7.  This is, for all practical purposes, a cash market.  Mortgages are tough to come by for locals and near impossible for expats.  Rates, assuming you have excellent credit, start at 15%.  If you have the cash, you are in a strong position.  Most American expats are renters.  Some because of point #5 but many others because they are living on Social Security month-to-month.  Something you can quite comfortably do here, BTW.  The other buyers are wealthy Ecuadorianos who also have cash.  But remember, this is still a poor country and those folks are few.

8.  You should never buy property without a clear understanding of how and to whom you’ll be selling.  It is well to remember that as attractively priced as stuff looks here, when the time comes those expats and locals with the cash to buy from you may be few and scarce.  In Ecuador, as in the USA, cash buyers are rare.  The difference is, in Ecuador they are virtually the only buyers.

That all sounds pretty grim, but the truth is the place calls to me.  If in a few years we make the move, here’s my approach:

1.  I’ll put our best and most treasured stuff in local storage here in NH; sell and dump the rest.

2.  We’ll move to Ecuador, probably Cuenca to start, with a couple of suitcases and set up month-to-month housekeeping in an apartment/hotel like Apartmentos Otorongo where I stayed for part of this past trip.

3.  From this base I’ll focus on finding a furnished rental like Condo #1 above.  This I’d rent for a year.

4.  During that year I’ll look at lots more property, both to rent and to buy.  I’ll talk to lots of expats about what they own/rent and how they found it.  By the end of this time I should have a very clear idea of what true market values look like.

5.  I’d also travel extensively in Ecuador this first year.  It’s a spectacular place and I want to see it all.  At each step I’d be evaluating where in the country to settle.  Cuenca and/or the coast look like the right places now, but who knows?

6.  At the end of this year+, I’ll also have a much clearer idea as to whether Ecuador itself is just a couple of year fling or the place I use as my traveling base for the rest of my days.

7. Based largely on the answer to #6, I’d make the rent/buy decision.

8.  Assuming we decide to stay for the long-term, the last decision is whether to pay to have our stuff shipped or to buy new furnishings locally.  Since I have little emotional attachment to the stuff I own, and since beautiful local art can be found and absolutely gorgeous wood furniture custom made for less than shipping costs, that looks like the path I’d take.

Despite all my cautionary points above, I love what I’ve seen of Ecuador.  I wouldn’t be so seriously considering relocating there otherwise.  I think the country’s future is very bright and they are on a strongly positive path.  My biggest dilemma really is where to settle.  I’m a city guy and I love Cuenca.  It’s small enough to be comfortable and large enough to have the amenities that make cities a joy.  Plus it is wonderfully walkable.

san-clemente beach

On the other hand, there are several beach towns up and down the coast with a very appealing laid back vibe.  Beautiful sandy shores that seem to stretch forever dotted with little beach shack restaurants serving seafood and local beer.  Not a bad way to while away some time.  One coastal expat described his town as what Cabo San Lucas used to be twenty years ago before it got overrun with yachts and multi-million dollar homes.  He hopes it doesn’t happen to the Ecuadorian coast but if it does he figures he’ll just cash out and find the next unspoiled place.  Not bad figuring seems to me.  Hmmm…..

Maybe I’ll rent in Cuenca and buy a little beach shack on the coast….

Addendum:  

Podcast –Why your house is a terrible investment

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