The MATH of Buying vs Renting (dollars, wealthy, refinance, average)

[mathjak107]

Originally Posted by Perma Bear

Or you could live in a car and invest the money not paid towards rent. That way I won't paying someone's mortgage and Lexus payment.

you can live in your car , i will pass thank you . renting works just fine and allows me to grow far greater money .

[Europeanflava]

Originally Posted by Perma Bear

I'd rather throw money on a fire than pay rent. It's pretty much the same in concept anyway.

I'd rent anytime as long as the payment per month is fair. The investment possibilities with not being tied to a mortgage are endless.

You could also turn that statement around and say paying a mortgage is throwing money in a fire, since most home owners never build enough equity in their homes to fully retire on.

[NewbieHere]

Real estate depends on location.

[Perma Bear]

Originally Posted by Europeanflava

I'd rent anytime as long as the payment per month is fair. The investment possibilities with not being tied to a mortgage are endless.

You could also turn that statement around and say paying a mortgage is throwing money in a fire, since most home owners never build enough equity in their homes to fully retire on.

You can invest as well as pay off a house.

[ground_pounder]

Originally Posted by isabella_bee

$150 a month for utilities and $100 a month for miscellaneous.

Those numbers seem a little low for a 3 bedroom house.

yup i agree that 150.00 is low for a 3 bedroom house. that 150.00 won't even pay the eletric bill in a 2 bedroom apt in co cal. but it all depends on where you are!!

[Perma Bear]

Originally Posted by ground_pounder

yup i agree that 150.00 is low for a 3 bedroom house. that 150.00 won't even pay the eletric bill in a 2 bedroom apt in co cal. but it all depends on where you are!!

our bill was 10.

[plot]

Ah the old renting versus buying problem. I love doing these calculations so lets see what I can do.

Lets assume we have a person:
Saving 9k a year.
Has 100k in savings.
Currently renting 2200.

Lets assume the persons income will increase, so that increased income will cover increases in rent, property tax, house maintain etc.

Case 1: Person buys house approach:
puts 100k down on a 350k house. Principle: 8,328 a year. Monthly payment: 1122.61.
Lets assume the house is in Texas and property tax is 2x, so property tax is 7000. So monthly payment + tax is 1705.95.
Lets include maintaining the house, so now the total is 2200.

In 15 years 126k is left in the mortgage and 135k in savings. The person pays rest of mortgage so now no more house payments and the person is now saving 22,400 a year. (1122.61 * 12 + 9000 = 22,471).

In 15 more years the person has 337k in savings. Lets assume the house is growing at 4.5% a year, so the house value is 880k. net worth = 880k + 337k = 1.21 million.

Case 2: Person invests in stock market and rents.
The person invests 100k in the stock market. Lets assume it grows 8% yearly. (I feel like i am being very generous with the annual returns).

In 30 years the person has 1 million in their portfolio and 270k in savings.
net worth = 1000k + 270k = 1.27M
This 1 million gained from investing is not taxed though! A 15% long term investing tax needs to be applied.

For fun:

Case 3: Person buys house and invest all their savings in the stock market.
Lets assume annual growth rates apply from previous cases.

So in 15 years the person has 244k in their invested portfolio and mortgage left in house is 126k. Lets assume person withdraws 150k from portfolio and pays of mortgage (that 150k is taxed also). So now the person is saving 22,400 a year, 94k in stock portfolio, and house is paid. Lets assume all the savings is going to be invested with.

So in another 15 years the portfolio is 906k, house value is 880k. Net worth = 1.78 Million. (without applying 15% long term tax).
Lets apply tax: 906k - 100k = 806k (apply 15% long term tax) = 686K
Net worth = 686K + 100k + 880k = 1.66 Million

Case 4: Person rents and invest all their savings in the stock market:
Lets assume annual growth rates apply from previous cases.

So in 30 years this person will have a portfolio of 2 million giving a net worth = 2 million.
Lets apply tax: 2000k - 100k = 1900k (apply 15% long term tax) = 1.6 million.
Net worth: 1.6 million + 100k = 1.7 million.

So it looks like there is no significant difference unless you happen to invest in the next Apple or happen to buy property in the next neighborhood that will be taken over by CEO and founders of major companies like in Silicon Valley Palo Alto, Los Altos, Atherton etc.

Now lets add the inflation rate of the American dollar to see how good these people did. Lets assume the inflation rate is 3% for the American dollar. In 30 years that means todays dollar will be worth 2.43. So now lets look at peoples net worth compared to todays dollar.

Case 1:
30 years+ net worth: 1.21 million.
In todays dollar: ~500k

Case 2:
30+ years net worth: 1.27 (no taxes applied)
In todays dollar: 522k

Case 3:
30+ years net worth: 1.66 million.
In todays dollar: 683k

Case 4:
30+ years net worth: 1.7 million.
In todays dollar: 700k.


Lets compare this to stuff that will adjust to inflation:

A 50k BMW:
Today: $50k
in 30 years: $121k

$3 gas per gallon:
today: $3
in 30 years: $7.30

$500 playstation:
Today: $500
in 30 years: $1,215

Mustang GT 33k
Today: $33k
In 30 years: $80k

40k harvard college tuition per year
today: 40k
In 30 years: 97k

People today say you need 1 million to retire "comfortably"
today: 1 million
in 30 years: 2.4 million.

Well thats enough math for me.

[mysticaltyger]

Originally Posted by EDS_

People bring this argument up often. The intractable problem with it is homeowners end up having 45x/46x the net worth of renters at the end of the day.

That's because renters, generally speaking, are stuck in a short term mindset in their orientation to life, more so that homeowners. As a result, renters don't save or invest their money.

What it really comes down to is what percentage of your income you save and invest. A big part of that is housing costs. If your total housing costs (whether renting or owning) are 25% or less of your gross income (ideally much less) and you save and invest a good chunk of your income (say, at least 20% of after tax income, preferably more), you're going to be in good shape financially regardless of whether you buy or rent.

The core problem people have is they don't save and invest most of the "extra" money they have. Homeownership acts as a forced savings in a way that renting doesn't. But if you are a committed saver / investor and you keep your housing costs reasonable, then it's not going to matter that much either way.

[mysticaltyger]

Originally Posted by Perma Bear

Nah I'm closer to the 50%. Why the hostility? Are you angry about your tenement?

Same difference. Median income earners are priced out of the housing market in the Bay Area.

[mysticaltyger]

Best article on renting vs. buying. Warning: It's long. It's designed for people who really want to think through ALL the issues involved, not just cherry pick the ones that support their point of view. This article is written by a woman who owns rental real estate, but it is very objective:

Renting is Throwing Money Away ... Right? - Afford Anything