Quote:
Originally Posted by Mr.C
A house like the one I live in is worth roughly 1.5 mil. Even with an extremely optimistic outlook that homes will continue to rise in price 7% a year, it's still cheaper to rent if the rent is under 3k or so.
"Honey, if we rent we can have an extra 10k/yr in the bank"... Doesn't sound like a hard sell to the wife.
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With all due respect, I don't think your math is correct. We recently analyzed this very decision (I'm an ex-accountant, now banker)... I've attached a screenshot of my spreadsheet adjusted for the figures you have proposed.
Assumptions:
1) Purchase price $1.5MM, 5.0% increase in value per year
2) High ratio mortgage with only 10% down, or $150K down payment, so CHMC insurance is required, costs added to the mortgage
3) I have assumed a 10% rate of return on your investment portfolio, which is pretty generous, and given a tax rate of only 30%
4) You have $165k down payment available and $6450/month available to either pay for housing or save
My spreadsheet operates on the assumption that if you rent a place, you immediately invest your whole down payment that you would have spent, and every month you invest the amount you save from renting into the same investment, all earning 7.0% after-tax.
If you rent: total net worth after 5 years of $481k
Your $165k you had saved up for a down payment is worth $234k after 5 years.
Your $3,450 per month that your rent was cheaper than owning, which you invested each month, is worth $247k after 5 years.
If you bought: total net worth after 5 years of $754k
Your $1.5MM house at 5% growth per year, over 5 years, is now a $1.9MM house. Your $1.4MM mortgage has been paid down to $1.16MM. The equity in your house, which is your net worth, is $754k.
I will be the first to say, there are a great number of assumptions, and in my own case, the outcome was not as great as I did not assume as high of a growth on the housing. But when I did sensitivity testing, considering interest rate increases, flat housing prices, etc. I still came to the conclusion that
for our apartment in Port Moody (all markets may not behave the same), there really was no circumstance that made it likely financially superior to rent.
Hope this helps,
Mark