Investing in Apartments: Off-Plan & Rental and Financing Methods ( Islamic & Conventional )
Investing in apartments is a popular choice in today’s real estate market. Understanding whether to invest in off-plan or rental apartments and knowing the financing options available can help you make informed decisions.
Off-Plan Apartments &Rental Apartments
Off-Plan Apartments: These are apartments still under construction. They often come with lower initial prices and the potential for significant value increases once completed. However, risks include construction delays and the final product potentially not meeting expectations.
Rental Apartments: These are completed apartments that can start generating rental income immediately. This type of investment provides steady cash flow and is generally more predictable than off-plan properties. However, it may require ongoing management and maintenance, and the value appreciation might be slower.
Financing Methods: Islamic & Conventional
1. Islamic Banking Method
Islamic finance follows Sharia principles, which avoid interest and use profit-sharing models instead.
Murabaha (Cost-Plus Financing): In Murabaha, the bank buys the property and sells it to you at a higher price that includes their profit.
Formula: Total Payment = Cost Price + Profit Margin
Example: If the property costs 80,000 BHD and the bank’s profit margin is 16,000 BHD, then the total payment will be: Total Payment = 80,000 BHD + 16,000 BHD = 96,000 BHD
Ijara Muntaheya Betamleek (Lease-to-Own): In Ijara, the bank buys the property and leases it to you. At the end of the lease, you may purchase the property. The lease payments include the bank’s profit margin.
Formula: Monthly Payment = Lease Payment + Bank’s Profit Margin
Example: If your monthly lease payment is 600 BHD and the bank’s profit margin is 40 BHD, then your total monthly payment is: Monthly Payment = 600 BHD + 40 BHD = 640 BHD
2. Conventional Banking Method
Conventional financing involves mortgages with interest, which can be either fixed or variable.
Fixed-Rate Mortgage: A fixed-rate mortgage has a constant interest rate over the loan period.
Example: For a loan principal of 80,000 BHD with a monthly interest rate of 0.004 (0.4%) over 360 payments (30 years), the monthly payment would be calculated as follows: Monthly Payment = 80,000 BHD × 0.004 × (1 + 0.004)^360 / [(1 + 0.004)^360 - 1] The actual monthly payment amount would be determined using this formula.
Variable-Rate Mortgage: A variable-rate mortgage has an interest rate that can change over time.
Example: For a loan principal of 80,000 BHD with a current monthly interest rate of 0.0035 (0.35%) over 360 payments (30 years), the monthly payment would be calculated as follows: Monthly Payment = 80,000 BHD × 0.0035 × (1 + 0.0035)^360 / [(1 + 0.0035)^360 - 1] The actual monthly payment amount would be determined using this formula.
My Advice
When deciding between off-plan and rental apartments, consider your financial goals, risk, and current market conditions.
Off-plan apartments might offer higher returns but come with more risks.
Rental properties provide consistent income and stability, though they might appreciate in value more slowly.
For financing, choose the method that aligns with your preferences.
Islamic finance is suitable if you want to avoid interest and follow Sharia principles. Conventional finance might be simpler but involves interest.