Author Topic: Buy vs. Invest  (Read 3085 times)

Vitai Slade

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Buy vs. Invest
« on: October 10, 2013, 04:37:13 AM »
I did a quick search and I couldn't find anything on it, but I was wondering if anyone has thought about the buy vs. invest option? Technically this is the rent vs. buy question, but with the twist that you could either have a fully paid off house or not have a house and have that value in investments instead. The quick math I did seems to lean toward renting while investing (provided that your rent isn't outrageous). For example, if you had even a cheap-average house like mine (125k) and could get 7-8% returns on that investment, your rent could be anywhere from $700-$830 AND you wouldn't have to pay property tax, repairs, etc. It gets even better if the rent includes partial utilities or cable/internet, etc. A more expensive house like a $200,000 house could afford rent of $1,150-1,330. What are your thoughts on this?

matchewed

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Re: Buy vs. Invest
« Reply #1 on: October 10, 2013, 05:12:16 AM »
It will all depend on the situation.

And buy vs. invest isn't really what's being asked. Regardless of whether you rent or buy you should invest. It's just a matter of determining which choice will allow you the largest cash flow to accomplish the investment.

Vitai Slade

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Re: Buy vs. Invest
« Reply #2 on: October 10, 2013, 05:20:10 AM »
It will all depend on the situation.

And buy vs. invest isn't really what's being asked. Regardless of whether you rent or buy you should invest. It's just a matter of determining which choice will allow you the largest cash flow to accomplish the investment.

I guess you didn't read what I posted. This IS the question being asked. Should you BUY a house or use that same money to INVEST in the market and let the returns pay your rent? OBVIOUSLY you should invest regardless, but that's not the question that is being asked. You can EITHER buy a house and have it paid off OR you can invest that cash and rent with the profits of that investment.

mr. T

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Re: Buy vs. Invest
« Reply #3 on: October 10, 2013, 05:44:25 AM »
Of course it still depends on the situation. A couple of questions you might ask yourself:

1- what is more expensive: paying a mortgage or paying rent on a comparable home? In some markets rents are very high, in other markets house prices are very high.
2- availability. Is there decent availability of rentals (or bought property) in your market?
3- inflation. Rents tend to be indexed by inflation. Mortgage interest can be fixed for long periods. If you expect high inflation, buying might be the better option.
4- the housing market. In areas with a shrinking population, houses might become very difficult to sell in the future. If you are an early buyer in a housing bull market, you might make a killing on the house you're living in.
5- expected investment returns.
6- fiscal treatment of home-equity versus investment capital.

You can expect investments to yield a sustainable cashflow of about 4% max (safe withdrawal rate). So $200k invested capital will yield about $8k annually, which is $667 monthly. So I think you're a bit on the optimistic side. You have to take into consideration that investments have good years, but also bad years where returns can be far below average. And in those years, the rent still has to be paid. You can have enough cashflow on average and still find yourself in trouble in a bad year.


Mega

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Re: Buy vs. Invest
« Reply #4 on: October 10, 2013, 06:09:55 AM »
My 300k house, once fully paid off, will lower my stache number by 600k.

Use the various calculators to see the impact of a rent free retirement, and compare to the cost of the house.

But in general, unless you already have a family, or are willing to have room mates, it is usually better to rent purely because of the flexibility it affords (e.g. You can move across the country whenever you want)

dodojojo

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Re: Buy vs. Invest
« Reply #5 on: October 10, 2013, 07:45:56 AM »
I went through this process this summer.  I opted for investing over buying. 

Buying meant I could invest but not max out my retirement accounts.  I have made a pact with myself that I will only buy if I can afford both mortgage and max out retirement accounts.

I also couldn't find anything I wanted to buy that would be cheaper than my rent (it's expensive compared to the national norm but below average for my neighborhood).  Even if there was a place that was on par with my rent--the location necessitated a car and that would significantly increase my monthly expenditures.  So I'm staying put in my apartment in an area with a 94 walks score.

matchewed

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Re: Buy vs. Invest
« Reply #6 on: October 10, 2013, 09:21:54 AM »
It will all depend on the situation.

And buy vs. invest isn't really what's being asked. Regardless of whether you rent or buy you should invest. It's just a matter of determining which choice will allow you the largest cash flow to accomplish the investment.

I guess you didn't read what I posted. This IS the question being asked. Should you BUY a house or use that same money to INVEST in the market and let the returns pay your rent? OBVIOUSLY you should invest regardless, but that's not the question that is being asked. You can EITHER buy a house and have it paid off OR you can invest that cash and rent with the profits of that investment.

Oh I read what you posted. Please don't assume that I didn't read because I didn't give the answer you wanted. You yourself admit it is just technically the rent vs. buy question. Let me try again now that you've attempted a clarification.

It doesn't matter if you can buy a house outright or rent or take a mortgage. There will still be an optimal decision financially depending on a variety of factors. I personally wouldn't buy a house outright in the current environment given today's still historically low interest rates and that is why I'm ignoring the outright buying option. It's a terrible option right now. I could take a lump 200k out of the market and put it into an asset that historically tracks inflation? Yuck. So IMO outright buying just doesn't make much sense in the current environment.

Also you speak of rent not having to pay property taxes or repairs, how do you think a landlord calculates rent? By factoring in those costs and rolling down to the renters with profit. Don't think when you're paying rent you're not paying for those utilities or other costs that homeowners incur, you are it's calculated in the rent.

Numbers Man

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Re: Buy vs. Invest
« Reply #7 on: October 10, 2013, 10:00:37 AM »
Buy vs Invest is like trying to answer whether the ying or the yang is better. I believe there are studies that show on average that real estate tracks closely to the inflation rate. But to me, there is a psychic income of intangible benefits above and beyond the math of buying vs renting and investing the difference.

It also depends on how much in taxes and HOA fees you pay. I paid $12k a year in Chicagoland but about $3.5k a year in Arizona. I feel like I got a big raise and have used that free cash to invest.