Buying vs investing and renting a house

 Ten years ago, I bought a house with a twenty-year mortgage.  It has been an emotional decision and, as I am about to become mortgage free, I would like to share some considerations and costs.

 

I will look at it as an investment and compare it with other investment opportunities.

 

House bought in 2016 for 475,000. House cost in 2026: 600,000

 

Total money paid:

• Initial deposit: 150,000
• Legal cost and tax: 14,500 (1,500 + 13,000)
• Three one off over payments over years: 34,000
• Monthly payments over ten years: 211,000
• Total paid to the bank:  395,000 plus initial cost 15,000

 

Still owe: 130,000 to the bank. Interest paid: 50,000

 

My preference was to lock the mortgage as fixed interest.  First five years the mortgage interest was 2.7%, the last five years 1.4%. I have also maintained monthly payments the same from the beginning, even with all over payments. Last year I was overpaying 400 a month.  The house grew in value 125,000 over ten years or 2.3% a year. 

 

We bought it emotionally and the sellers’ agent used our feelings to full extend – we overpaid 25,000 over sticker price. This is despite that we had no ongoing chain – the seller got their money straight away, without any waiting.

 

Opportunity cost.

Mortgage or rent

One of the point of attraction while buying a property is that you are "freezing" the cost and if it goes up in the future, you reap all the rewards.

What is missing from the evaluation that your interest rate on the principle will go up to compensate for it.  This is particularly the case for western europe, where most of the mortgages are it either variable rate, with fixed rate mortgage are 5 year maximum.

Lets look at an example buying vs. renting a house.  

House price - $475,000, down payment is $150,000  interest rate is 2,7%, mortgage is for 20 years.

	Renting	Owning (Mortgage)
Monthly payment	-1,650	-1,750
Annual payment	-19,800	-21,000
1 year interest*	10,500	- 8,700
Principal paid	0	12,300
House up keep	0	-3,000
Insurance	-150	-1,000
Mortgage application		200**
Total	-9,450	-12,900

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 .

Rate of Return (ROI) on Investment - Real Estate Apartments

I have  been recently contacted by a reader asking for a help to analyze results of investing into 2 condominiums (apartments).

Here is the input data (story):

Apartment #1  (Apt. #1) - initial investment $ 56 K back in 2005 and additional amount of money in 2010 - $170 K.

Apartment #2 (Apt. #2) - investment $ 170 K in 2010.

The questions are:

 - Whether the investment in the real estate worth it and what is rate of return (ROI)? 

 - What to do next - sell them or keep as rental properties?

Is real estate (property) worth investing as rental income?

Is real estate (property) worth investing as rental income?

I would like to make on assumption in order to reduce uncertainty and number of plausible scenarios :  the  real estate price will be constant and appreciate at inflation rate and all received income will be invested in mutual fund to get average income.

I am considering buying a well positioned one bed room apartment – 750 square feet (68 m2)  with parking lot.

Initial cost $ 170, ooo,  the parking lot will cost additional $ 50,000.  The parking will improve occupancy rate and make it more attractive in busy center.

The apartment will be furnished, so additional $20,000 is required to buy the basics.  Total investment is $240,000 USD.