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

[lightmyway82]

@childofgod1115 While I’m generally biased towards the conclusion op came to, this is a good point.

If you’re assuming growth in investments exceeds the interest rate on the mortgage, presumably you would then not deploy excess capital towards deleveraging.

Don’t think it has a material impact on ops maths though, for the assumed rates

 

[childofgod1115]

@lightmyway82 It comes out much of a muchness on the house - less monthly expenses, but lower capital gain after paying back the remaining dept, but, critically, it reduces your monthly mortgage expenses by ~2k. If you put that in shares, as OP is doing in the rental situation, you would come out quite far ahead of both scenarios posted.

 

[lightmyway82]

@childofgod1115 I’m not sure it would put you very far ahead on a net basis, considering the assumed mortgage rate is approximately equal to investment growth

 

[nat12]

@childofgod1115 This is the answer. Combination of both. Use max leverage to gain highest profit from deposit used to secure house and continue to maximize investments in other areas. Housing is much more profitable when maxing leverage.

 

[nurrse7075]

@childofgod1115 If your house price doubles but you’re buying back into same market - have you gained anything (gen curious)

 

[mikes1222]

@turboizak Why are so many people in this sub writing like Americans?

 

[caroljoy]

@mikes1222 They're using ChatGPT for replies.

 

[deenamathew]

@caroljoy Aha yea I’ve noticed that so much recently. It’s a nightmare trying to hire people now

 

[caroljoy]

@deenamathew Yeah, it really is, the only benefit is you can have a search for phrases that the free ChatGPT often uses to automatically eliminate people.

 

[shoeshavetongues]

@turboizak Very nice post, I always love a good spreadsheet analysis!

Auckland House Prices haven't made financial sense in a long time... but you can't change the thinking of most people and that's why it's been a self fulfilling prophecy for so long.

Though I do believe we have hit a point where Houses literally can't increase a whole lot more in the short term. Therefore currently investing in growth asset vehicles is where I would put my money if I had to choose. But then again you just never know...

 

[ligm]

@shoeshavetongues One thing on the home ownership front is the compulsory savings - you HAVE to pay your mortgage every month. It doesn’t sound like this is a factor for you as you are investing anyway. But for some it can be hard to invest every pay cycle - each time an unexpected bill comes in (new tyres, vet bill, dentist etc) it can be an easy thing to drop the regular investment to make room for it.

Mary Holm recommends renters invest the difference between their rent and full home ownership costs to ensure they can continue to afford rent into retirement (when many home owners will be mortgage free).

 

[usernamednameduser]

@turboizak You should probably do the math based on a 25-30yr mortgage term, where any additional money not needed for repayments is also invested.

 

[pauline56]

@turboizak interest rate - 7.25%, property value increase rate - 6%, share price increase rate - 8%

where are these numbers coming from? seems quite arbitary. 7.25% interest rate is something you can only get by shopping around for the highest rate

and it looks like you didn't consider tax into the calculations? unless you factored them into the %s.

it would be more interesting for your spreadsheet to incorporate a range of % for the important rates and see how the numbers stack up in different scenarios. e.g. what does it look like if interest rate is 4%, property increases by 10% and share price increases by 5%? what does it look like if interest rate is 10%, property and share price increase by 2% etc etc

 

[michaelo]

@pauline56 Agreed, strange you were the only comment that noticed this. 7.25% for the next 10 years doesn't seem like a reasonable assumption. I'm pretty dubious about 8% return on shares, too.

 

[pressfrancis]

@michaelo That stood out out to me

I can go get a mortgage today for significantly less.

While past performance doesn't indicate future rates, 7.25% for ten years would be an unusual assumption based on interest rates over last 20+ years, even if you put aside the Covid related dip.

No one can predict the future of course, but the immigration tap has been turned to full on so I do think it is more reasonable to expect pressure on both rental prices and house prices

 

[nathanjs]

@pauline56 You're spot on. Need a two-variable sensitivity table so we can see the impact of rate fluctuations.

 

[blessedisshe]

@pauline56 Or house increase at only 3%. Interest rate of 6% on the mortgage and stock increases of 10%.
Past house price increases are no indication of future performance. The longer the OCR stays above 5% the longer the housing crash continues.

No tax on share price increase.

But need to add $4k per year compounding @6% for rates.

 

[alyssapettey]

@turboizak At the current price, buying doesn’t make sense. Rent yield is lower than the equivalent amount of money in the bank earning interest.

However, you can buy a house on a lot of leverage which is something that you can’t do with other assets. Also this is a good way to protect yourself from inflation if inflation persists in the economy.

Whether renting is better or worse than buying is ultimate dictated by future house price and I think the current house is a reflection of the current sentiment.

 

[luckymum]

@alyssapettey I agree with this. Everyone that bought prior to 2019 and sold after that got a good return on money that they borrowed

 

[sherbetmayhem]

@turboizak It costs far more to sell than 1%