Bchad…well, you do it assuming a margin of safety right? so yes you’re right ,its extremely complex when you put it into a math form (not quantum physics type math but hard enough).
lots of the assumptions you have you assume away…take conservative measures like min housing price increases and reasonable rates inflation and you should have a rough idea…
to me when i found out it cost me the same to rent and buy, it was a no brainer …(maybe i’m wrong here)…
I mentioned the location specific nature via the “space market” comment. This will determine rents, and thusly house pricing, which is used to determine new development, which feeds into the space market, which determines rents. Boom.
REITs, please PM for contact details.
I know my brother went from a small apartment to owning a house/land with 2x the square feet. His monthly payments were cut in half. He just found a bankruptcy and put 8,000ish into paint and simple repairs
what’s the expected rate of return on your condo vs the expected rate of return of investing your downpayment???
the opportunity cost of the down payment is the trickiest of all especially since i bought in March 2009. i would use 3.5% for the equivalent of a no risk investment over a 5 year period.
it would be nice to think that i could have earned 2X-3x my money from my downpayment as that was my results investing during that period but that is not realistic. in the end my real estate appreciated somewhat as well.
in all likelihood, i made out better buying than renting for sure. at least that is how i look at it. renting was 1400-1500/month (albeit at a nicer pplace) whereas my mortgage+fees/taxes came to roughly 1300…
I am seriously thinking about the Atlanta market, a lot of nice houses are going for $70-110k which is peanuts in comparison to NY. If I put 50% down, I can have a house that’s paid off in 5-7 years!
Why pay it off when you can get financing so cheap?
I second this question
Why not? It’s just another liability on the balance sheet. Instead of worrying about making month to month payments, I extinguish the debt early. That’s what I did when I financed my car. Paid it off early, saved the excess funds and went nuts in Vegas.
wouldn’t it be better to have the payments, and use that “pay off” money to invest? Isn’t that the whole lesson of present value theory? assuming that you can get a return higher than the rate you are borrowing at? which is highly likely for loans of 4-6%apr with inflation at 2.5%.
Maybe you are comfortable with that, but I’m not. It’s one thing to face imminent foreclosure, it’s another to have a margin call on your investment account.
I’m with you bpdulog. I hate debt even if it’s cheap. Plus there’s the cashflow benefit once the debt’s paid off. Paying off a car, for example, is a few hundred bucks of cash in my pocket each month. That’s more attractive to me than DCAing into an investment trying to marginally beat out my cost of debt. Personal preference theory.
^this. I like sleeping well at night. Please teach me how to invest at 4% risk free too. You don’t gamble with your lunch money.
In Canada, interest is not tax deductible, so you will have to have a return higher than the after-tax borrowing rate.
As a real estate guy, I can tell you there is no such thing as “imminent” foreclosure, at least on the commercial side. It takes forever, then you work out a deal with the bank to pay a quarter of a month’s debt service which pushes it another 4 months. Its ridiculous how propped up the financial system is. For houses, the foreclosure rate basically depends on how much the bank can process, how much loss the bank can take in that quarter, how much bad PR they think they can handle that quarter, etc. The borrower is basically a secondary concern.
Buying a house shouldn’t be a gamble… if you can’t pay your note for 6 months without income, you’re not ready. Investing every bit of liquidity you have in risky assets while trying to cover your cost of borrowing isn’t any different than leveraging up a portfolio of small caps. Not a very good idea.
If your income is “bond-like” however, then I see no significant advantage to short term mortgages over fixed long term. Money is cheap now, and there are tax benefits as mentioned. Once you set aside some rainy day funds in cash, then chances are whatever extra savings you invest in equities will outperform over time.
I saw (I think, maybe some other economist) Shiller on CNBC a few months back. Apparently they’ve done studies on the rate of return of one’s primary residence vs renting. I remembering it being something like in the 6-9% range. It’d be interesting if I Could remember who that was and find the research.
Also, what if you were able to borrow at or under inflation? Would you still pay it off early? I understand the aversion to leverage, but isn’t finance all about the prudent use of leverage.
do you live below the mason dixon line?
+1. So true lol 
I looked at it this way when I bought a house. Granted it is very basic numbers, but helped me make the decision to purchase.
Purchase price was 420k, put 10% down, got a 4% 30 year fixed rate. Over the course of the 30 years, assuming I pay no additional amount every month, I will pay a total of about $270k in interest. If I then look at the monthly amount of that, 270k/360 is about $750 a month. Here in Boston, there is no chance of getting rent for that unless I want to live in some slum hole with 2 buddies in southie. Since I am operating under the assumption that I can sell my house for the price I bought it at in 30 years (i know inflation will be raging and this will not happen), then I paid $750 a month to live in my house, not some dump apartment. I realize the $750 is way to basic of a number, as it doesnt include property taxes, insurance, upgrades, utilities and other housing related costs. However, that $270k in interest that I pay, along with taxes are tax deductible, so really my total cost is less. Let’s say I pay the equivalent of $600 a month when the tax advantage portion of interest is factored in, that gives me probably close to $1000 a month in housing related costs that I have to work with to get to $1600 a month, which is what I would be looking for when renting for me and my family.
Granted there are always trade offs between buying and renting. I used to be of the midset that buying was a total and complete waste of money, aso you wind out losing in the long run because of the amount you pay in interest. Now I don’t think that to be the case. I also think there is an intangible aspect of home ownership that personally for me is higher than if I rented.
I do agree now though that financing a house at 4% is great. At first I was going to pre-pay a little bit every month, but I am confident I can make more than 4% a year investing, so I will forgo pre-paying for now.