Author Topic: Reader Case Study: Asset allocation: Rent vs. Buy  (Read 1278 times)

balevine711

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Reader Case Study: Asset allocation: Rent vs. Buy
« on: July 13, 2015, 06:50:27 AM »
Hello MMM form,

First off, thanks to everyone sharing with the world. I really appreciate it and am looking forward to the feedback here.

I've got a question that I was hoping you could help me explore:
Given a fixed budget to allocate between housing costs and investing, is it better to rent or buy?

I know the matter of housing is a personal question, but let's set all that aside and look at the numbers. I've developed a spreadsheet (https://docs.google.com/spreadsheets/d/1kUazjXfoheDkBLTNEP4S9oUgNcxCjB7OlvtdHVGgb_w/edit#gid=1510910161) that runs quite a few scenarios comparing different monthly rents to different purchase prices and mortgage lengths.

I have a few more specific questions that I think will help guide the exploration a bit, as it is a fairly open ended question:
  • Are my assumptions in the ballpark? (MMM, if you are reading, I happen to live in Longmont too, so I'd welcome your local market knowledge into my model.)
  • Am I missing any major costs or benefits from my model?
  • We all want to generate passive income from investments, but are there any other financial metrics I should care about when exploring this question? Does net worth matter?
  • I think this exploration is all about optimizing where I'm riding on the "money wave". Is that the right way to look at this issue?
  • How should taxes fit into the picture? I have a 25% marginal tax rate and the opportunity to invest in a 401k (no matching). Currently maxing out both my IRA and wife's Roth IRA. The model ignores taxes for now.
  • Should I attempt to account for possible changes in housing+investing budget over this 30 year model? There's a reasonable chance I could invest more in my 10th year than in my 1st. There's also a reasonable chance I'd want to reduce my earnings (and my time spent working) at certain milestones (probably not before 15 years).

I've been mulling this question over and over, particularly as I watch my area's housing market take off like a rocket. I don't want to be left behind, but I fear I'm too late. I don't think there's much housing stock left in the area for a family of four under $300k, in which case renting seems to win clearly in race for building passive income. Am I right?

  • Life Situation: filing jointly, two dependents ages 6 and 3, living in Longmont, CO, wife and I are age 32
  • Gross Salary: $130,000/yr, $10,833/mo, no other income
  • Pre-tax deductions: $5,500/yr to traditional IRA, $6500/yr to HSA, 401k option just became available to me (no matching)
  • AGI: $118,000/yr
  • Taxes: Federal 25% marginal tax rate, Colorado 8% margin tax rate: $2244/mo
  • Take home pay, after taxes: $8589
  • Monthly expenses: $2368/mo for rent, phone, internet, utils, insurance
  • Monthly everyday expenses: $1040/mo for groceries, fuel, dining
  • Post-tax savings: $1700/mo cash, $541/mo HSA, $458/mo Roth IRA
  • Debt: $165/mo student loan ($134 principal, $30 interest), $8500 balance
  • Assets: $53k: Cash savings: $15k, HSA: $16k, Traditional IRA (via wealthfront, risk tolerance set to 10): $11k, Roth IRA (via wealthfront, risk tolerance set to 10): $11k


Thank you,

Brian

forummm

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Re: Reader Case Study: Asset allocation: Rent vs. Buy
« Reply #1 on: July 13, 2015, 01:23:04 PM »
You should max out an IRA for your wife too. Max out your 401k also. Max out one for your wife if she works and has that option too. A 30 year mortgage is fine.

"passive income" is misunderstood by many. Having your savings be invested in a diversified portfolio is important. It doesn't matter whether your investments are returning dividends, appreciating in value, or both. Any of them is great.