Lol, in one of these you are paying partially principal and in the other you are purely paying rent…really they should solely include the interest portion and any other expenses that are typically only paid by home owners (insurance, taxes, etc.). Really useless.
Really sad analysis (although legal). People keep lying that american dream is dead, but dream is alive and well. Some people would say it is the best dream ever!
Lol on the original question. I actually created a model just to answer it. I basically input crap like current rates, pmi, tax, hoa, maintenance, dp, actual rent . And it calculates the Cash return on any upfront cash like down and comimisson. Then i add the appreciation to see see expected total return is taken. I’ll only invest when the cash return is at the rate of inflation. The total return is a lot higher like 15 percent or higher and will depend on how much down I use. But lower down typically has higher cost via higher rates, higher loan, etc, so cash is more negative. So it’s a give and take, plus you have other considerations and limitations, banks want you to have a debt coverage ratio of 1.25.
Lastly housing has a longer cycle than the market but also less appreciation. It’s more cash flow dependent. So pray to god your tenant doesn’t leave. There are also frictional costs if people keep moving sndbiut
The change in tax laws wrt the standard deduction makes renting better than owning (in my case).
Before you had tax benefits for the mortgage interest by itemizing. Now you get the benefit from the increased standard deduction ($24k if married filing jointly) regardless of whether you own a home or rent (for most average-above average priced homes)
My rent is $1,500 (includes everything). Good neighborhood- close to groceries, restaurants, highways. A 2-3 bed townhouse here (near DC) would cost around $500K (more if in good school district). With PMI, taxes, utilities, HOA, the monthly payment would be around $3,000 (give or take, since HOA could range from $50-$300 for townhouses depending on what the HOA provides).
Of the $3,000, you’d get about $600-700 back in Equity in the early stage of amortization. Rest is all unrecovered cost. So the net cost of ownership is $2,300. In the old tax laws, the net cost would have been even lower (since you’d take out Int * (1-T)), so you had a financial reason to buy over rent.
the best value 2/2 condo in tarzana ca, which is 10 min from woodland hills 20 min from century city, 30 min from dtla. would cost 260k. i like to look things yearly so convert it for monthly if u like. anyways potential rent is roughly 24k vs potential housing costs of 32k. but a bunch of that is depreciation so cash flow wise is really 2k per year. all in closing is roughly 57k. so cash returns is around 3.5%. inflation is the kicker, if its 3% appreciation, ur lookign at a 17% annual return. its actually a pretty good deal, the median price for a comp is around 290k, if you were to buy at that, itd be a -1% return on cash, but 12% when appreciation is included. also assumign a 3% appreciation is kind of high esp at current prices. btw for previous example i removed tax benefits. assumed 0. although if u have rental profits, you can offset it with 1 another and it becomes a real benefit.
anyways overall though its a good deal. these condos usually crash hard when recessions hit and utilization goes to shit cuz people lose their jobs. and hoa is a pain in the ass, hoa is like 4k to 9k or roughly 33% of typical rent. so the owners end up selling really cheap when they cant find someone to cover it.
Suppose regulators impose banks to loan up to 90% of mortgages, so your bank lends you 900K and you pay upfront 100K for a 1M flat. The banks charges 5% annual interest on your 20-year mortgage. Assume 0$ other kind of commissions.
Obviously we are comparing buying this 1M flat vs renting an identical flat that worths 1M.
The rule of decision is simple: Compare total economical cost of buying vs total economic cost of renting
1) Renting:
Suppose a rent of 3.5k per month
Total rent expense (20-y) = 840 K
2) Buying:
Total interest expense (20-y mortgage @5%) = 512K (use interest payment in excel using these parameters)
Total interest income forgone in the 100k paid upfront (20-y income at 10% rate) = 572 K >> [(100 x 1.1 ^20) - 100]
Total capital appreciation of the house at year 20 at a growth rate of 2% (minimum inflation) = 485K ( 1M x 1.02 ^ 20 - 1M)
Total net cost = 1,084 K - 485 K = 599 K
You guys can move the parameters regarding your local markets, also assume different levels of terminal value of the flat in case of buying.
I have bought my own flat instead of renting btw, no regrets.
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I would bump that rent up to about 6,000-8,000. No way you’re renting a million dollar home for only $3,500 a month
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I calculated total paid out in Principal and Mortgage and I’m getting 525.5K
N= 20 * 12, I = .05/12, PV = 900K, FV = 0, CPT PMT = 5,939.60
5,939.60 * (20*12) = 1,425,504.40
1,425,504.40 - 900,000 = 525.5K
- Assume atleast a 5% tax and maintenance expense on the home value per year so (.05 * 1,000,000) = 50,000, 1M over 20yrs
Rent for 20y = assuming lowest rent at 6,000 monthly, 72K per year and rising at a 2% inflation = 1.75M in rent expense over 20yrs
Home = 525K + 572K + 1M - 485K = 1.6M
Net Gain on buying = 1.75M - 1.6M = 150K over 20 years