Rent vs Buy: we look at the advantages and downsides of renting vs buying property in Medellín. Which is better for expats – renting vs buying?

The choice between renting or buying an apartment or casa (house) in Medellín is one of the biggest financial decisions that foreigners moving to Medellín make.

For many years in the U.S., buying a home was a measure of financial success. But the housing crisis in the U.S. changed that. The United States housing bubble affected over half of the U.S. states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012. And since 2006, the percentage of renters has been increasing in the U.S.

In 2016, I surveyed over 200 foreigners living in Medellín and found that 31 percent owned their apartment/home. A majority (49 percent) rented unfurnished apartments and 19 percent rented furnished apartments or furnished rooms.

Several readers have asked about renting vs buying. There are arguments on both sides of the rent vs buy decision. And we look at the advantages and downsides of renting vs buying in Medellín.

Apartment buildings near Santafé mall in El Poblado, Medellín

Apartment buildings near Santafé mall in El Poblado, Medellín

Advantages of Renting Property in Medellín

Rents are very cheap in Medellín. We recently surveyed 70 unfurnished apartments in four popular neighborhoods for foreigners (El Poblado, Envigado, Laureles-Estadio and Sabaneta) that were also for sale. And we found that annual rents were 5.9 percent of the purchase price of the apartments we surveyed. In other words, the price to buy on average was 17.1 times higher than the annual rental price.

We previously surveyed 1,000 unfurnished apartments in the five most popular neighborhoods for foreigners to find out unfurnished apartment rental prices in Medellín. Also, we recently surveyed rental costs of 300 unfurnished apartments in 6 inexpensive neighborhoods in Medellín where you can save over 30 percent compared to El Poblado.

In addition, when you rent in Colombia, you don’t have to pay for repairs, maintenance, administration fees (homeowner’s association fees) or property taxes. These ongoing fees and taxes are paid by the property owner.

Also, renting isn’t throwing money away as some people seem to think. With your rent payment you get a place to live.

Furthermore, buying property in Colombia by foreigners normally requires having 100 percent of the purchase price, as mortgages are very difficult for foreigners to get. It requires much less up-front money to rent in Medellín.

Finally, with renting you get flexibility. You can move to another neighborhood anytime, when your lease is up. If things change in your life and you need a bigger or smaller place or your current neighborhood has become less safe or you find a better place to live, it’s easy to move to another place when you rent.

Downsides to Renting Property in Medellín

There are two major downsides to renting property in Medellín: the fiador requirement and the fact that rents can increase by inflation, which we look at in more detail.

1. Fiador requirement

Real estate agencies in Medellín and Colombia require a fiador (cosigner) for renting unfurnished apartments.

Once you start looking at unfurnished apartments in Colombia you will quickly find that real estate agents in Colombia generally require a fiador. Fiadors are not unique to Colombia and are common in other countries in Latin America such as Mexico and Peru.

A fiador is essentially a cosigner who guarantees a tenant pays rent. So, the real estate agent can go after the fiador of the tenant stops paying rent. In addition, a fiador must be an owner of local real estate.

Under Colombian rules, a real estate agent is normally responsible for collecting rent. Essentially you have a contract with the real estate agent and the real estate agent has a separate contract with the apartment owner. And the real estate agent pockets the difference between the two contracts as his commission.

So, the real estate agent is responsible for collecting rent from the tenant and paying the owner. And this is why almost all real estate agents require a fiador.

But there are several ways to overcome the fiador requirement. The most common ways to overcome this requirement include:

  • Paying rent in advance
  • Renting directly from an owner
  • Pay a deposit
  • Use a CDT as a security deposit

We previously looked at overcoming the fiador requirement in detail.

2. Rents Increase by Inflation

The annual rent increase for unfurnished residential properties is limited to inflation in Colombia. There can be an increase in the rental price every 12 months. This increase is limited to 100 percent of the inflation increase (consumer price index) in Colombia for the preceding calendar year.

Colombia’s inflation rate was 3.2 percent in 2018. So, in 2019, landlords can increase rent by a maximum of 3.2 percent at renewal time.

But this is negotiable. In several of my apartment renewals I had no rent increase or I was able to negotiate an increase lower than the inflation rate. In nine years of rental contracts, only twice did my rent increase and both times the increase was less than the inflation rate. And twice my rent decreased due to moving to a new place.

In addition, if a tenant thinks that the increase by a landlord is higher than the inflation rate, the tenant has six months to request a revision with the Mayor’s office of the city where the property is located.

Getting the keys after buying a property

Getting the keys after buying a property

Advantages of Buying Property in Medellín

When you buy an apartment or casa, you own it – it’s yours until you sell. You eliminate the monthly expense of paying rent for housing.

Buying a home can be good for someone who plans to settle down for the long haul and who doesn’t want to be beholden to the whims of a landlord.

When you buy a home, you get home improvement freedom. So, there is no landlord telling you what you can and can’t do to improve your home.

Also, when you own a home you benefit from property appreciation. But keep in mind that property appreciation in Medellín is in the local currency and doesn’t factor in the currency risk.

The Colombian peso has been weak over the past four years. Due to this currency risk, foreign investors who bought properties five or more years ago in Colombia may have lost money in terms of U.S. dollars (USD). This is even though properties may have appreciated in terms of Colombian pesos.

USD to COP 10-year exchange rate history, 5 years ago the exchange rate was under 2,000 COP to the USD, source xe.com

USD to COP 10-year exchange rate history, 5 years ago the exchange rate was under 2,000 COP to the USD, source xe.com

The exchange rate may be favorable now as it has been in a higher range over the past four years than in the prior eight years. But exchange rates are very difficult to predict. What happens if the Venezuelan crisis become worse and many more Venezuelans come to Colombia? What happens if there is another global financial crisis?

Apartment buildings in Laureles, Medellín

Apartment buildings in Laureles, Medellín

Downsides to Buying Property in Medellín

In addition, there are several downsides to buying compared to renting including:

  1. Mortgages are difficult to get for foreigners
  2. Closing costs
  3. Administration fees – ongoing
  4. Property taxes – ongoing
  5. Repairs, maintenance and remodeling – ongoing
  6. Opportunity cost

We look at each of these downsides in more detail:

1. Mortgages are Difficult to Get for Foreigners

If you are a foreigner it is extremely difficult to get a mortgage in Colombia. If fact, it’s even difficult for Colombians to get a mortgage. So, the mortgage market remains very small in Colombia. In 2016, reportedly less than 4 percent of adults in Colombia had a mortgage.

To be considered for a mortgage as a foreigner in Colombia, you will need to have residency and have lived in Colombia preferably for several years. You will also need to have a bank account in Colombia and a credit history in Colombia. And you will likely be asked for proof that you file taxes in Colombia. You need to be well-established in Colombia before banks will even consider lending to you.

Also, Colombian mortgage rates are much higher than in the U.S. Colombian mortgages typically have an interest rate of over 9 percent with a range of amortizations of 5-20 years but still require 30-40 percent down payment for those who can qualify.

For this reason, most property purchase by foreigners in Colombia are done with cash. So, to buy property you need to come up with 100 percent of the purchase price plus closing costs. Also, since you aren’t financing there isn’t a tax break for mortgage interest that is common for buyers in the U.S.

One way around the mortgage challenge with banks in Colombia may be to arrange a private mortgage with the seller of the property. But in most cases, such private mortgages are usually for short periods of no more than five years.

2. Closing Costs

Also, you need to factor in closing costs when buying and selling apartments and houses in Colombia. You obviously don’t incur these closing costs when you rent. Closing costs include notary and registration fees as well as legal fees and real estate agent commissions.

Closing costs in Colombia include:

  • Withholding (Retención en la Fuente) – 1 percent, paid by seller
  • Registration (Registro) – 1 percent, split 50-50 by seller and buyer
  • Government tax (Rentas) – 1.05 percent, split 50-50 by seller and buyer
  • Notary fees – usually less than 1 million pesos, split 50-50 by buyer and seller

In addition, there is the real estate commission of 3 percent usually paid by the seller. Also, there are legal fees for a title study, purchase contract and closing/title change, which typically cost between 2.3 to 3 million pesos depending on the value of the property.

For a 300-million-peso property, the closing costs would be roughly:

  • 6 million pesos for the buyer
  • 5 million pesos for the seller

In addition, the seller would be responsible for paying a 3 percent commission to the real estate agency. And the buyer would be responsible for legal fees of approximately 2.6 million pesos.

So, the buyer would roughly be paying about 2.9 percent of the purchase price for closing costs and legal fees and the seller would be paying about 4.7 percent of the purchase price for closing costs and real estate agency commission.

Apartment buildings in Sabaneta near Aves Maria mall

Apartment buildings in Sabaneta near Aves Maria mall

3. Administration Fees

Administration fees are for apartments in Colombia and are paid monthly by owners. An administration fee is like a homeowner’s association fee in the U.S. and covers shared expenses in high-rise apartment buildings for things like security, pools, building landscaping and maintenance of shared areas.

Administration fees vary by building and neighborhood for apartments and are normally paid monthly.

We surveyed the administration fees in 70 apartments located in four popular neighborhoods for foreigners (El Poblado, Envigado, Laureles-Estadio and Sabaneta) and found that the annual administration fee ranged from 0.58 to 1.10 percent of the purchase price. The average annual administration fee for the apartments we surveyed was 0.85 percent of the purchase price.

Also, administration fees are not fixed and typically increase each year by the inflation rate.

4. Property Taxes

Property taxes in Colombia are about 1 to 1.4 percent annually (paid quarterly), which is lower than many international markets. Also, keep in mind that property taxes are based on the title that is lower than the actual sales price.

For rental properties, keep in mind that property taxes are paid by the property owner.

6. Repairs, Maintenance and Remodeling

If you own an apartment or casa you will responsible for ongoing repairs and maintenance. In the U.S., many websites recommend budgeting 1 percent of the purchase price of a property annually for maintenance.

But I believe property maintenance costs are lower in Colombia with the lower wages and the fact that most apartments and casas in Colombia don’t have yards to maintain or heating or cooling systems to maintain. Some expats I have talked to in Medellín have told me they budget about 0.5 percent of the purchase price annually for ongoing maintenance and some home improvements.

Maintenance can include painting, regular pest control, repairs to water heaters, toilets and water leaks. In addition, home improvement and remodeling costs could include a kitchen or bathroom remodel that can be costly.

Also, age comes into play here. A new home built within the last five years will probably not need much maintenance, while homes 5 to 20 years old will need more. And once a casa turns 20 or 30, there’s possibility that major components, such as the roof, may need to be replaced.

6. Opportunity Cost

When you buy a property, you incur an opportunity cost. Keep in mind that the amount you use to buy a property including closing costs you could otherwise invest. So, this is an opportunity cost.

It is very dififcult for foreigners to get a mortgage in Colombia. So, to buy in Colombia most need to pay cash when buying an apartment or casa in Colombia. So, you are paying 100 percent of the value of the property on day one with no financing. If you rent, you could invest this money in more liquid investments like stocks or bonds.

Use a rent vs buy calculator

Use a rent vs buy calculator

Use a Rent vs Buy Calculator

The New York Times has a popular rent vs buy calculator that factors in the most important costs associated with buying and computes the equivalent monthly rent. Note this calculator uses U.S. dollars (USD).

When I recently ran this calculator for my situation with a 20-year-time-period, it found that it is better if I can rent in Medellín for less than $443 per month. And I am currently renting a 3-bedroom casa (house) for only 1,050,000 pesos per month ($311 USD per month). So, renting is a better option for my situation.

Medellin Guru’s Guide to Renting Apartments

On the Medellin Guru website, we have a comprehensive and up-to-date guide to renting apartments in Medellín found in several articles, including:

Renting unfurnished apartments:

Renting furnished apartments: 

Choosing a neighborhood in Medellín:

Also, we have several articles that can be used to help foreigners choose a neighborhood in Medellín:

Apartment buildings in El Poblado, Medellín

Apartment buildings in El Poblado, Medellín

The Bottom Line: Rent vs Buy – Downsides of Renting and Buying Property in Medellín

The bottom line with the rent vs buy decision in Medellín is that neither option is inherently smart or dumb. To each his own and everyone’s situation is different. However, we do highly recommend renting for at least a few months in Medellín before buying.

Also, with no real tax benefits for ownership and the need for most foreigners to pay 100 percent cash to buy properties, the rent vs buy considerations are different in Colombia for foreigners than in the U.S.

So, it’s worth looking at a rent vs buy calculator for your individual situation to see what option is cheaper for you. And make sure to consider all the costs involved including the opportunity cost.

Rents are cheap in Medellín and a majority of foreigners living in Medellín chose to rent. But many foreigners I have talked to also have bought properties and are happy with their decisions.

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