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

[ffyddgobaithcariad]

@turboizak TLDR - if u buy, the first 10 years your literally just throwing 80% of ur money down the drain with these interest rates because amortization. Just pretend you pay $1000pw repayments on your mortgage, now take $800 of that and just flush it down the toilet. Thats the best way i like to think of it.

 

[ireneh]

@turboizak You need to have somewhere to live for 100% for the rest of your life. Have you included that detail?

I bought a house, because fuck renting when I'm old.

 

[aero17]

@turboizak Mortgage rates won’t remain at 7% for ten years best to use 4 or 5%. Rent will go up with inflation but mortgage payments won’t. 45% deposit is generally an inefficient use of capital as you aren’t maximising your ability to make a leveraged investment which you can do with property but cannot with stocks so easily.

 

[seekinggod]

@aero17 Not quite. As a general rule in investment, don’t put your money in a basket. If you put all your money in property, you are exposed to higher risks.

 

[justone]

@turboizak I have a friend who did those sums 20 years ago. Now, instead of being mortgage free he's paying $750 a week in a place he's always rented. He doesn't want to move and the price just keeps going up. Shit happened of course with his investments.

Shit happened with the value of my house recently but I'm mortgage free so it matters not one bit.

This is not mathematical but the risk involved in home ownership is quite a lot less than other investments.

 

[sherylb]

@justone "shit happened" with his investments doesnt matter either as he likely wont have any debt on his investments. And if he has taken debt on them - he would have well outstripped anything you made on your house over the last 20 years by orders of magnitude.

If it is in a bad shape after 20 years of investing he must be utterly atrocious with investing, I imagine your friend is likely sitting on an enormous stack of assets but is keeping quiet about it

 

[turboizak]

@sherylb 100% agree with this. Unlike housing gains, share investing, bond investing, and dividend income are quiet and not much spoken of, even when they're big. I think it is another reason why the majority of the people don't pay attention to the other investment route.

 

[sadcdmom]

@turboizak Lol you can't make dinner in your stocks though

 

[cpwusaf33]

@turboizak Im no math wizz. Your numbers look good to me. With such a down payment you could get a cheap investment home and still keep half your stocks. Youd be hedging your bets.

Weve had record wage growth over the last few years if and when interest rates start to go down people will be able to pay more and the market will probs go bonkers again especially when with a national govt in power.

 

[resjudicata]

@turboizak To do this on a like-for-like basis you need to treat the monthly investments as an expense - in the same way you’ve treated principal payments as an expense. That drops the net gain from investments by $360k

 

[mixster90]

@turboizak Just browsing the numbers, and it would seem there's alot of assumptions in your model around costs and interest rates etc. Also $8000+8000 wouldn't be correct if property price increases (it will be more) if I understand your meaning.

There's all sorts of ways this could play out. But based on my experience having effectively made about $400k on my first home with a $46k initial deposit 7 years ago, is that gearing matters alot. Also, renting seriously sucks in this country, and will likely be worse now the landlord bought and paid government is coming in. I would never go back to renting voluntarily.

 

[kokie]

@turboizak Can you factor in Inflation because I suspect houses hold well against inflation but savings will suffer?

 

[rainchild]

@turboizak Why only a 10 year scenario? Do you intend to only need a house for 10 years? What does the maths look like over your expected lifetime?

I note also that those homeowners without mortgages are much less vulnerable to financial issues resulting from income loss. We all expect to be able to earn all our lives, but accidents (and pandemics, as it turns out) can cause permanent income reduction or loss.

 

[marionsantiago]

@turboizak The stock market could crash alot more than housing. You question the 6% house price increase but not 8% stock market increase. The future is hard to predict.

 

[turboizak]

@marionsantiago Yes, it could very well crash. That 8% is not guaranteed, just like the 6%. The reason I assumed 8% gains is because there are many industries that are well positioned to take advantage of the high inflation conditions that we are currently in. When we come out of the inflationary environment, those businesses can retain their pricing power. The risk is also lower when you compare it to the price to income ratios in the RE market.

Therefore, imo, 8% return on investment is not unreasonable, especially when you compare that opportunity cost to paying the same amount compounded as interest payments.

 

[fast4america]

@turboizak Yours maths are right but your assumptions are questionable. Any equation where you keep interest rates above expected return will be negative

 

[ziggyroo]

@turboizak I think that there is a fatal error in your analysis.

You count your $350,000 deposit as an expense when purchasing the property, but then don't count this as a gain when selling the property.

You get your $350,000 capital back when you sell the property, so this should show as part of the net gain realised when selling the property.

The only expense related to this use of capital is the opportunity cost (the difference between investing the $350,000 in housing vs stocks). You are assuming an interest rate of 7.25% on the cost of borrowing, and a return of 8% on stocks, so the opportunity cost is 0.75% return compounded over 10 years.

Happy to be proven wrong, but I don't think I am.

 

[mamadonald]

@ziggyroo It's included in the house sale price

 

[ziggyroo]

@mamadonald This is what happens when I try to math before the coffee has kicked in.

I now understand your calculation. You have proven me wrong, and I am happy.

 

[nathanjs]

@ziggyroo Don't think you are - it's on both sides of the ledger plus that opportunity cost.