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

[turboizak]

@sherbetmayhem It is 4%, as pointed out by @sherylb

 

[mariposa7]

@turboizak I think buying rn only makes sense if you're doing it to "put down roots" so to speak but not as an investment

 

[anyo]

@turboizak It blows my mind people say "rent money is dead money", which it is.

But I own my house outright, it's $950k

Electricity is up, I have a pool so that's $1.2k a Q
Rates = $1900 a Q
General maintenance is atlesst $3-$10k per year, just say about $7k

1900 + 1200 + 1750/12 = $404 Per week (didn't even add house insurance).

Normies really fall for the bait that owning your home is awesome, when in reality it is... but relative to the price your paying.

I'd advise people to just rent and invest in stocks, eventually your stock portfolio will scale so much it will pay and rent purely from the gains you make yearly.

Imagine spending 20 years of you life investing in an asset that might even trend down.

 

[ikon]

@turboizak Your assumption of 7.5% interest rate over 10 years is way too high. Re-run the numbers at an average of 5-6%.

Also 8% PA on stocks is far too optimistic.

 

[confuzed001]

@ikon Agreed, timeline on the mortgage repayment is way way too short.

 

[hkra]

@ikon Then there's the tax you pay on the stocks returns...

 

[curlyq74]

@turboizak Was your maintenance calculation intended to include council rates? Another sizeable cost to ownership and increasing a lot faster than inflation each year. That said, as others have pointed out, ownership comes with stability/security, over those 10 years and also the possibility of adding to your income through renting out a room.

 

[resjudicata]

@turboizak No-one knows what shares and property will return in future, but decades of rising prices mean low earnings yields and low future returns with the risk of large declines wiping out speculators on borrowed money.

 

[wallywoodrow]

@turboizak You're buying a home for stability if you have a child and somewhere that's hopefully paid off when you retire. Nothing else. It's end game shit not making money shit.

 

[seekinggod]

@turboizak Came here to say you’re not alone. I’m in exactly in the same position as hours. Not seeing property ownership is a way to a better life in NZ, especially with the crazy house prices. Having my money in investment funds gives me the freedom to move wherever I like whenever I like.

 

[authorann]

@turboizak Thanks for this!

I agree with the conclusion and it brings me comfort to see the maths/analysis laid out like this.

 

[kitty88]

@turboizak If you say that shares are earning you 8% after tax then would the buying house calculation not make more sense if you only paid interest on the mortgage (treating it like rent) and put all surplus into shares? Taking the leveraged tax free capital gains on the house.

To challenge some assumptions
• is 8% return post tax achievable
• cost of owning a home is light, even just rates/insurance, but then add maintenance etc. also selling cost is light.
• rental growth maybe a bit light. 110k net migration this year, that’s the size of Dunedin. I would assume most are renting. If this continues I think it will be a disaster for the rental market. Cost of building is too high.
• at the end of the 10 years you will have a debt free house. Rent or mortgage will be zero. Allowing aggressive share investing. Rent will continue forever in your other scenario.

On your last point. wage growth is important for individual households, but I think productivity growth is more important as a whole. Investing in shares gives businesses capital for growth, I think it is better for NZ as a whole than everyone tying up all their capital in housing. It would be great if more people invested more than just buying houses as their sole asset, but the forced savings of debt repayment with tax advantages makes it hard to beat for most people. I just wish houses were a sensible price.

 

[grace14]

@turboizak I do wonder about your assumptions. I agree that housing is at its peak and 6% growth may be generous but that is true also with stocks.

 

[srutz]

@turboizak If you look at home ownership from a purely financial POV in many cases you are probably better off renting - which obviously suits you.

However, people buy houses for all sorts of other reasons other than the $$: peace of mind by not being at the whim of a bad LL or PM, building community for the long term, adding value via improvements if you can do them yourself, control over your own destiny - and as someone said, not being in a vulnerable position of renting when you’re old. You may not always be in the position to pay rent for nice places because unknowable health issues that affect your ability to earn.

As someone who has worked really hard and paid off a mortgage, the feeling of being rent and mortgage free is so good and opened up life and other decisions. It has also not stopped us having fun or travelling.

 

[resjudicata]

@turboizak To buy or to rent?
That question was asked in an article on interest.co.nz
Was it properly answered? There is many variables in the modelling/equations and especially predicting what will give better financial outcome in the future requires some significant assumptions too.
I wouldn’t buy at the current prices. House I am currently renting for $640/week is estimated at $870k on homes website. Assuming 20% deposit (despite having more), the interest only repayments would be higher than my current rent. If I owned it, I would also have to pay rates, insurance and contribute to a maintenance fund that I would need in the future. Not to mention that most of my money would be in a single basket - neither geographical, nor sectoral spread of the risk of capital allocation.
But everyone needs to make their own decisions.
https://www.interest.co.nz/property/rent-or-buy

 

[sherylb]

@turboizak Yep I think your math makes sense. Except its actually quite generous to housing.

I think the 4k per annum is way too low for the non mortgage expenses of home owning.

- Rates are around 2.5k.

- Insurance has increased a lot recently. So thats likely another 3k.

- Most people need to get income protection insurance when they have a mortgage. So thats another 2k.

- Many places have BC fees on top which could range from 3k to 14k a year (although that generally includes the home insurance part).

- Repairs and maintenance, with basic R and M being 1k to 2k a year and then most people will need or want to do renovations which will make next to no deference on resale value/cap gain. So it might be more like 7k a year factoring that in too.

- the transaction costs on selling are far too low. Reasonable for buying. But selling will be far higher. I understand most estate agents charge 4% on sale price.

- 10 years is actually much longer than average holding time. Average home own duration is 6 point something years in NZ. So, that time period of 10y is generous too, Those buy and sell transaction costs tend to come much quicker than 10y.

 

[nathanjs]

@sherylb

Most people need to get income protection insurance when they have a mortgage

No they don't. Some people may choose to get it but it is not a requirement of the mortgage.

 

[sherylb]

@nathanjs Its not a requirement. But most people get it. Due to to the enormous debt people take on nowadays due to house prices. And if they dont, they are utter sitting ducks who could easily face bankruptcy under a multitude of different scenarios, collectively of which, one has a high likelihood of occurence - high chance of occurring plus enormous consequence = something' you MUST get insurance for.

 

[turboizak]

@sherylb Your numbers make sense. Thanks for your input!

 

[hankventure]

@turboizak You're underestimating your rent.

600 p/w is closer to 2600 p/m as a month isn't 4 weeks.

So total rental expense is shy about 31,600.

Also are you including tax in your 8% growth stock portfolio? Stock returns are generally split into capital growth and dividends. The dividends will be taxed. This could easily bring 8% down to 7%.

Another issue is that your monthly outflow of cash in rent scenario will increase each year assuming fixed investment amount and a growing rent. To compare the two scenarios you need to keep monthly cash flows the same. So you'll need to increase the amount you invest per month each year in the "buy" scenario to keep up with the rising rent in the "rent" scenario.

Your analysis would be better if you looked at a range of possibilities.

I would start with the assumption that returns on both are equal and then find condition under which one out performs the other and ask yourself how likely that is.

Edt: oh man every time I look at this I see something. So to calculate your net investment gain you've calculated your net gain on your 350k investment but you're using your gross result for your monthly investments. To get net you need to subtract and additional 360k from the total.

Also the way you're calculating the interest on your monthly investments is wrong. If the stocks return 8%per annum that is not .08/12 % per month. This inflates your stock returns by about .3% per year which adds up.