Rent vs. Buy - Is my math correct? Am I missing anything? (An Analytical Approach)

[turboizak]

@cfitz Interest rate changes are directly linked to growth and vice versa in all free market economies. You can not be immune to these changes just by owning a home. When the interest rate rises, the non-mortgage expenses of housing will go up as well.

On the other hand, if you are renting and have an investment portfolio in businesses and companies with strong pricing power to sustain and take advantage of these rate changes. You can come out the other end unscathed. In that sceanrio, you may be better off investing in those assets than all of it into a home.

 

[cfitz]

@turboizak Your comment doesn't directly relate to what the other poster was discussing ("the interest rates will rise with inflation."), which I was aiming to discuss with them.

But to your points...

Look, I get the argument overall argument you're making and I don't have a strong view one way or the other, because I think individual circumstances vary so much there isn't a general rule you can apply. I agree an investment and wealth strategy avoiding property could be a viable option for some people.

That said.. in your direct post above you have pretty poor logic.

You're claiming that:

- Investment in property is not immune to interest rate volatility and increased expenses

- However, a wealth strategy based on business investments can take advantage of the changes and 'come out the other end unscathed'.

Ok, great. But you can also apply strategies and benefit from interest rate changes if you're investing in property as well... you can't claim one side can benefit and not the other.

Interest rate increases are a major risk for many businesses and cause many failures and valuation decreases.

 

[gamebai886]

@sherylb In theory yesterday,stock returns over the years but most can't follow this. That's why buying a home is forced savings. There's very hard rules for buying to pay off, BC would be a no no. It's on going costs that rise, silly if your goal was to pay off

 

[sherylb]

@gamebai886 Depends how financially disciplined you are I guess.

 

[gamebai886]

@sherylb Well I hope they would make it their #1 goal, thats what it takes

 

[turboizak]

@gamebai886 Yes, that is the reason everyone needs to invest in assets and not save money. Assets can mean other things than just homes.

 

[luckymum]

@sherylb Unless the contracts states you cant?

 

[turboizak]

@gamebai886

Personal finance 101 is lower your expenses and add that to the payments. By owning, you also catch any upside in equity along with having inflation eat away at your debt since yearly your income will increase. This is what I did and knocked off 12 yrs on my 25 year mortgage. 7.5 of those years my income was less than 50k till I got a 2nd job

Agree with the lowering expense to build equity. It is the same with renting. There are many investments other than home ownership that help you achieve this goal. Times have changed. Apart from the pure emotional benefits, I just find it hard why people are not willing to explore other investments to achieve similar or better results even.

 

[steve7150]

@turboizak The advantage of home ownership for anyone who isn’t investment savvy, is that is effectively a forced investment, because the money you are spending on accommodation is for an asset not an expense, and money literacy of many of the general population means not many truly think that much about the difference. So renters will often use the retained difference between renting and owning costs to improve current lifestyle, rather than investing it for long term security.

 

[gamebai886]

@turboizak Yes that's true. You just have to do the maths. Right now with the financial cycle, the maths doesn't make sense with lending so tight. People can't wait for a better deal or think 5 or 10 years ahead.

Self control with a cell phone with the ability to buy many things anytime is the down fall of many in this generation.

 

[amos_6eight]

@turboizak Homeowner here. Mortgage free.

I'll go to my grave arguing that owning a home is a silly FINANCIAL decision. But I chose to have a family and having a secure base is probably invaluable.

But man, the cost of this fucking thing in the long run was/is outrageous. Being financially minded, I was always aware that it's just a money bonfire. Not just the interest I paid to the bank, but rates, water, insurance, maintenance, etc. It just seems to have a way to pick at your pockets constantly. Especially if you're like me and like to keep it clean and tidy and looking nice.

Yes, I'm sitting pretty now, but the opportunity cost, financially speaking, was immense.

 

[turboizak]

@amos_6eight Thanks for your comment. Yes, there are many additional costs involved in home ownership that are not included in the above estimate. As you mentioned, having a secure base is invaluable.

I personally think everybody should own a home eventually, without the rushing to buy one.

 

[patib]

@turboizak I think I’m missing something here?

It looks like you’ve counted your principal repayments as a cost of owning the home. Every principle repayment adds to your net worth.

Under the buying scenario, after the 10 years your net worth is about 1.5mil (house plus investments)

Under the renting scenario, after the 10 years your net worth is about 1mil (investments only)

 

[michaelo]

@patib The first scenario has way more money sunk into it which is why the net worth is higher even though the return is lower. There's no mistake in that aspect of the analysis but take the endpoint of this analysis as the start point of a second one. From 0-10y renting comes out ahead but from years 10-20 you'll see a different story, even with the extremely generous stock market returns and extremely pessimistic interest rates assumed. Once you do some sensitivity analysis on it also, it becomes much greyer.

 

[resjudicata]

@michaelo No I think it’s a mistake. They’ve treated principal payments as an expense but the additional monthly investments as part of the net gain. The amount invested is more in scenario 1 but that’s very relevant to the analysis given it’s essentially I’ve got $x per month, how am I better off in 10 years.

 

[michaelo]

@resjudicata I think you might be right actually

 

[michaelo]

I don't want to seem to negative, I have to commend OP for running the numbers instead of making an emotional decision. I'd also advise them to be very careful with their assumptions though as this calculation is very sensitive to the interest rate.

 

[patib]

@michaelo Agreed, although I maintain OP’s made a critical error by including principal repayments as a cost

 

[patib]

@michaelo Both cases have his initial $350k capital invested. In the buying scenario it forms his down payment, in the renting scenario it grows to $426k, forming nearly 1/2 of the 1 mil net worth after 10 years

 

[childofgod1115]

@turboizak Hang-on. Are you suggesting you pay the whole mortgage off in 10 years? Why on earth would you do that if you're looking for capital gains? Housing is about leverage.

Pay the P+I on a 30 year term, or even interest interest only. You do not have to pay the house off to sell it for gains. Your expenses will be far lower, it doesn't matter that you still have 350k or whatever left owing when you sell as in your scenario you almost doubled the house price.
Then put the difference in monthly expenses into shares as you have done.

Run those numbers and the housing scenario will tear ahead on your same assumptions