Did some analysis on buy vs rent for a 2M house. The goal is to put forward an alternative view where instead of buying we stick to renting and investing the money saved. The thought was to get a clear idea as to who is a winner atleast for Bay Area.
Let's say I am looking to buy a 2M house with 20% down and get a 3.00 APR for 30 year, by monthly payment would look like
Monthly Mortgage : 6746
Property Tax : 2000
Insurance : 100
Gardener : 100
Miscellaneous : 200
=====================
Total : 9200
Let's say the house would appreciate to about 4M (100 %) in the next 10 years best case scenario. So you are looking at 2.4M profit ~ 2 M after agent fees.
Mortgage paid off at end of 10 years : 350k
So total profit : 2.35 M
The same house I can rent for 4500 now with an annual increase of 4% 10 years rent ends up at 6500 (If you are renting a single family house from the same landlord most likely rents don't increase every year but considering the worst case scenario).
So with 400000 as initial investment (which would had been down payment) and around 4200 $ per month saving from (mortgage - tax deduction - rent)
Tax deduction is complicated so taking 600$ per month.
At 8% interest the investment grows to about 1.7Million (Considering 8% which is also on high end, since for housing we are considering best case scenario)
I am looking at a 10 years perspective since kids will be in college by then we might not care about a good school district and move to a lower rental place. Also we don't need a big house for just 2 of us, so we would be able to cut down on rent.
So we are looking at 1.7 Million by renting vs 2.3 M from house appreciation.
Pros of buying :
1. Appreciation is higher by about 30%
2. More stability in terms of moving, kids friends
3. Freedom of renovating the house
Pros of renting :
1. Less stress in terms of making a high mortgage and having less liquid money.
2. More freedom in moving in case schools and community doesn't work out
3. Freedom to move out of the country/state once kids go out of school and go yearly airbnb.
Things I haven't considered is inheritance.
What are your thoughts on this ?
Personally I feel at this point in Bay Area both renting vs buying hold true and it depends on your personality and risk tolerance.
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comments
4M is huge you are looking at 18k Mortage payment on really old houses. Salaries wonβt increase by that much given remote work might be the norm.
If someoen has a house they do not need and cannot/do not want to sell - they will rent it at any rent they cna get - nothing to do with the cost of owning the RE.
But past performance may not be repeated. Ultimately, one option is leveraged and the other isn't. One is diversified and the other isn't. If sea levels are rising and definitive research comes out that SF will be under water in 50 years, prices will plummet overnight and never recover.
But stock markets, even when they plummet, do eventually recover if you're diversified.
Ultimately it's a gamble.
Another question to ask: do you really need a whole house or will 2-3 bedroom apartment do?