Buying or renting a house or apartment is one of the decisions that almost all of us will have to make at some point in our lives. And it is not easy.
Despite already having our apartment in Zhanjiang in China my wife and me have been seriously considering buying another residential property in Guangzhou in China where we currently live and work. The distance between Zhanjiang and Guangzhou is approximately 400km, or a four-hour drive. We are thinking of buying a small townhouse this time.
Here are the arguments for and against buying a townhouse in Guangzhou which would serve as our primary residence in this city in the next several years.
ARGUMENTS FOR BUYING ANOTHER PROPERTY:
1. MORE COMFORT:
- Live comfortably and freely at home. It is a fantastic feeling to be able to live in your own home. You can decorate it according to our own taste. You can buy whatever furniture you like. And, you can even paint all the walls pink. Or, you can keep the place completely empty, if you wish. The place belongs to you and yourself only. So, as the owner, you can do whatever you want with it. The power of owning an asset is huge. You are the king of your own land!
- No need to move house. Moving to another place when the current rent expires (and is not being renewed by the landlord) always sucks, especially if you like the current place! When owning your own property, there is no need to relocate every time when changing from one rental apartment to another. There is no need to pack and then unpack all the things that you have at home such as clothes, shoes, bedding, baby stuff, kitchen appliances, food supplies, etc. We currently have quite a lot of things at home because of our two small babies.
2. HIGHER FUTURE EARNINGS:
- Possible capital gain in the future. Real estate prices as well as the value of businesses will most likely always increase in the future. This is just how it is on the market – people need to do something on daily basis and they also need to live somewhere. You buy an apartment today for a lower price and then, ten or twenty years later, the real estate prices double or triple. So, you sell for a much higher price and collect the capital gain. This capital gain would surely increase Net Worth of My Family, if we decided to sell that apartment one day in the future.
- Rental income. Alternatively, to selling the apartment in the future for the capital gain, we could rent it out instead to collect rent from our tenants. However, this would mean that either us (or someone else) would need to manage the rental property for us. If we did not live in Guangzhou anymore, it would be a hassle that we do not want to mess around with.
- Inheritance for kids. At the right time in the future, we could pass the property down to our children. Upon inheriting such a valuable asset, they could use it as their own primary residence to live in, sell it for profit, or rent it out to other people and collect rent.
ARGUMENTS AGAINST BUYING ANOTHER PROPERTY
1. LARGE CAPITAL REQUIRED:
- Need large capital for purchase. To buy a medium-size townhouse on the suburbs of Guangzhou, we would need to spend around RMB1,500,000 – RMB2,000,000. Currently, with having two kids, we need at least a 3-bedroom-2-bathroom one to make sure that everyone is comfortable. This kind of money is rather a large sum as it could easily cover our annual expenses for the whole family for the next 15 years.
- Need more capital to close the deal. In order to finalize the purchase of a property in China, we would need to spend additional RMB50,000 on Deed TAX and the agency fee. Real estate in China is almost always bought and sold using licensed real estate agents which charge around 1.5% commission fee. The Deed TAX is usually between 1% to 3% depending on the size of the house and whether you or the landlord already own other properties. Therefore, for this amount of money which we would have to spend on additional fees to make the house purchase happen, we could easily buy a second-hand car to make our daily family life more comfortable.
- Need even more capital for renovations. Renovating the whole townhouse, buying new furniture and decorations would perhaps cost another RMB300,000 yuan at least. I remember that when furnishing our 90m2 apartment in Zhanjiang a few years ago, we have spent around RMB150,000.
- Need to pay for fixing broken things. Well, if we owned the place, we would have to pay for fixing whatever breaks in the house. It could be a small thing such as a broken lightbulb or a big thing such as a broken water pipe or the fridge. Maintenance costs of a large apartment would surely require us to spend a significant amount of additional money. We would also need to oversee maintenance and fixtures by ourselves as the owners. Now, when renting the place, all maintenance issues are arranged, handled and paid for by the landlord. So, we can have peace of mind.
2. LESS PASSIVE INCOME:
- High opportunity cost. As mentioned, we would need to spend around RMB1,500,000 – RMB2,000,000 on buying a fairly nice townhouse outside the city of Guangzhou. This money will be frozen in another unproductive asset that does not generate any passive income. Our primary residence in Zhanjiang is currently worth around RMB1,500,000. So, this is a huge opportunity cost of around RMB3,500,000 in total.
- Less passive income. I would need to give up my strategy of investing in bank deposits as I am currently building the second passive income source. If invested in bank deposits at 3.5% annually, RMB2,000,000 would generate us RMB70,000 per year in passive income, or RMB5,833 per month. Plus, additional housing allowance which I currently receive from my employer each month to rent an apartment. It gives RMB9,333 per month in given up income. The idea of losing almost RMB10,000 per month makes me feel very uncomfortable.
3. UNDESIRABLE IMPACT ON PORTFOLIO:
- We already have our home. We already own an apartment in Zhanjiang in Guangdong Province, China which serves our primary residence – our home. It is a very beautifully decorated apartment with fantastic view over a large park with the lake. It is located around 10 minutes from a sandy beach. As this apartment accounts for only 30% of our current Net Worth. It means that the remaining 70% of our Wealth is invested in money-making assets working for generating us passive income. And that is what I like!
- Too much cash invested in real estate. If we bought another property in Guangzhou decreasing our cash holdings, it would then mean that perhaps as much as 70% of our Net Worth would be invested in physical real estate. This would be way too much of our Wealth to be invested in physical real estate in two different cities in China for me to accept. I do not want to have that much exposure in our portfolio into illiquid real estate. My primary aim is to build a fairly balanced portfolio by owning both physical residential real estate as well as more liquid bank deposits and online business as well as the most liquid marketable securities including dividend stocks, ETFs and REITs.
4. CURRENT LIVING CONDITIONS ARE FINE:
- Our current rental apartment is pretty good. We currently rent a very spacious, bright and well-equipped apartment. It is around 110m2 in size. It has 3 bedrooms and 2-bathroom. It is fully furnished and does not need any major improvements. It also has convenient location for me to commute to work. I am able to walk to work and arrive back home within 20 minutes each way. However, some small adjustments will be needed in the near future to improve the place such as adding a few pots with plants and more kitchen equipment, etc.
In summary, after giving it a deeper thought about buying or renting, we concluded that the idea of buying another home in another city in China would present more advantages for our family than disadvantages. Therefore, our plan is to buy a townhouse in Guangzhou in addition to owning another apartment in Zhanjiang. Keep your fingers crossed and wish us success!
