Friday, March 28, 2014

Buying vs. Renting

Buying vs. Renting
After certain considerations I am coming back to review whether it worth buying a house or keep on renting.
Here is our current assumptions:
Desired house price – $ 450 K, current rental price for the home we live in -  $ 16.8 K ($ 1,400 a month).
Available saving for closing cost and down payment - $ 100 K, net annual money available to pay mortgage $36 K.
Mortgage – 6% interest rate, annual real estate price inflation (appreciation) – 4%.

Cost of buying (closing cost) will include – mortgage arrangement fee, moving in cost,  property buying tax, structural survey of the house – all together $ 20 K
We have accumulated deposit of $ 100 K, so after cost of buying (closing cost) the house we could pay $ 80 K, as downpayment or 18%.

One of the most important things to understand it how much you could afford to spend net (after tax) towards your mortgage. This will determine how much could borrow, comfortably. Of course, there is rule of thumb, when buying a property – to have 20% as downpayment and  amount of money a bank lend you is 3 times of your gross income (before tax).   We have been tracking our family budget for last 5 years, so do have pretty good idea how much do we spend and where the money are going to.

In our case we could comfortable put a side $3 K a month for mortgage (principal and interest) and some additional $ 200-250 a month to cover house and life insurance. 

Another factor to consider : depreciation and re-decoration.  People  frequently focus on how home prices are appreciating, but they forgot that those prices are for well maintained hoses.

Same as with the original example on the property owning, we set up periods:
-         Redecorating house  - every 10 years, this would cost about $ 40 K (new kitchen, equipment, central heating, windows, doors, etc…) or $4 K a year.
-         Replacing house – every 60 years . My estimate that out of $ 450 K , half of it is the prices of the house.
$240 K for 60 years - $ 4.2 K .

All together:
Buying cost

House Owning cost

Mortgage arrangement fee
Annual insurance
Initial deposit
Property tax (3%)
(every 10 years)
Real estate price inflation
Moving in
 (every 60 years)
Mortgage interest rate
Structural survey
Maintenance (garden, etc.)
Monthly rental
Lawyer’s fee
Total annual
Income available to pay mortgage
Annual payrise
Return on money invested

Base case:
As you could see only after almost 60 years renting is becoming more expensive, than  owning. This is a life time cost over the 60 years.
However this does assume uninterrupted money supply available (for example, dividends, salary , etc..)

Net Worth over the period of time buying vs. renting:

Net worth buying presents money available should you default and sell the house or value of the house (once mortgage is paid off), if it is well maintained.

Net worth renting – if remaining money, instead of paying mortgage would be invested and you get 3% interest on them.

As you could see, initially there is quite a gap, as instead paying downpayment and buying cost, the money are re-invested.  For the first 10 years, you would better off investing the money.

Case:  Living cheap (only essential redecoration and maintenance) - $ 30 K for 10 year on redecoration, $50K every 60 years –repair (i.e. roof replacements, timber etc..).
In this case after 40 years it is getting cheaper to own a house, rather than rent it.

Case: Equal returns – when you get the same returns on your investments, as house price appreciation.
The bottom line is that  if you want to make economical sense out buying and enjoying living in the house – there is none. Your very best home to gain anything is to buy one and invest in it, as little as possible.

However there is sentimental value attached to it.

Pros and Cons – Buying vs. Renting house
-         Assuming uninterrupted income stream cost of renting is less than buying and owning a nice house.
-         Renting is a hustle free opti0n – no serious maintenance, no headaches  and freedom where to live.
        -     You could always stop maintaining house temporarily or permanently, once retired and save yourself some money.
        -      It is not sustainable for the most of us, to accumulate enough money to retire and live off income from invested money for life, including rental.   We will have to stop working someday. Having a house brings a lot of certainty.
        -       It is a diversifying investments as well, i.e. not everything in the stock market and stocks.

No comments:

Post a Comment