Buy vs rent maths :

Jun 23, 2021 62 Comments

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.

comments

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TOP 62 Comments
  • Apple
    veaT73

    Go to company page Apple

    veaT73
    10% return on house and 8% return on stocks?
    Jun 23, 2021 5
  • Something you’re completely missing, which is where joke ownership becomes the true winner by an insane margin. When the home is paid off, you can pull the equity out, but retain the home, rent the home out and use the pulled out equity towards an investment.
    Jun 23, 2021 12
    • Apple / Eng
      HypeOS

      Go to company page Apple Eng

      HypeOS
      What profit? This is not a product that is manufactured. There is no profit and nothing is baked in. The rent is dictated by supply and demand like other commodities. Why do you think rent performance can diverge so much from RE price + maintennace?
      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.
      Jun 25, 2021
    • That’s literally what I said, and that’s where profit comes in. Yes I make a lot of profit on my real estate.
      Jun 25, 2021
  • See the problem is uncertainty. In the last 10 years, both stock market and real estate grew exceptionally well.

    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?
    Jun 23, 2021 2
  • I'd say buy in most places but bay area houses are not gonna see crazy (or maybe any) appreciation going forward so id advise only renting in Bay area. Only buy if you wanna move to a cheaper market that hasn't peaked. Houses are even pricing out tech people now. It's a problem. I've known a lot of people that have left bay area due to remote work now with no plans on returning. There is a creeping exodus of people, the effects will be felt eventually.
    Jun 23, 2021 0
  • PayPal / Product
    product@

    Go to company page PayPal Product

    BIO
    I love
    product@
    are you the sort of person who would rent a car or buy one ?
    Jun 23, 2021 1