A little help with rent vs buy please

[doneby35]

I've been using a rent vs buy calculator, specifically this one since it is quite detailed https://michaelbluejay.com/house/rentvsbuy.html to compare buying a $150,000 home in cash vs continue renting for what currently is $13,800 per year.
Assuming a 3% inflation rate impacting rent, or any housing expenses such as maintenance and insurance in the case of buying, in addition to an assumption that the house will appreciate 3% vs 7% if the cash was invested in the S&P500 instead.
The calculator indicates that renting will be the better deal financially when paying the entire amount in cash AND looking at a 30 year window. However if I instead look at a 10 year window OR take out a loan at 7% interest rate with a 20% down payment instead of paying the entire amount in cash, buying will be the better deal. So...

1. I'm having trouble clearly understanding this. Am I really better off not paying $150,000 in cash and only put 20% down with a loan at 7% interest rate and then invest the rest?
2. Should I really assume that S&P500 will return 7%? or a more conservative 5%? a little more context is that I'm FIRE'd and if I will not be reinvesting the dividends. I assume the 7% return includes dividends being reinvested?
3. Should I even be looking at 30 years for the math or is that too long of a window?

[nereo]

1. I'm having trouble clearly understanding this. Am I really better off not paying $150,000 in cash and only put 20% down with a loan at 7% interest rate and then invest the rest?
2. Should I really assume that S&P500 will return 7%? or a more conservative 5%? a little more context is that I'm FIRE'd and if I will not be reinvesting the dividends. I assume the 7% return includes dividends being reinvested?
3. Should I even be looking at 30 years for the math or is that too long of a window?

1. By my quick analysis and assuming near-average returns, the answer is a resounding yes, providing you actually stay in this house long term.

2. First, remember that your loan rate is fixed, and you are talking about 2024 dollars. The actual long-term return of the S&P500 with dividends reinvested is closer to 11%. It’s typically reported as 7-8% because that’s the real rate of return (adjusted for inflation and transaction fees). Fees are now essentially zero (they weren't until the late 1990s).  As for inflation, remember that you are getting a loan for a fixed amount… inflation goes in your favor here.  simplified math example: if your rate is 7% and inflation sits around 3% your adjusted interest rate is around 4%.

But the broader question remains, will the S&P return at least 7% with dividends reinvested and NOT adjusted for inflation in the next 30 years?  No one knows. But it would be one of the poorest multi-decade period if it returned “just” 5% in absolute terms with dividends reinvested

3.  30 years is the relevant timeframe IF you plan on owning this house for that long. Is this a “forever home” for you?  If you stay for much less time the equations change dramatically as you don’t realize the compounding forces of inflation and selling tends to rack up huge transactional costs.

Some more thoughts
A) the biggest factors about whether to own a home aren’t strictly monetary. Ownership gives some degree of freedom to decorate, make alterations, and frees you from the landlord terminating the lease or raising the rent (though in most municipalities there’s some renter protections against this).  On the other side of the coin, owning ties you to one place (can be good and bad), increaseS your risk that you will be on the hook for unexpected very large repairs, and requires a great deal more time for general maintenence than if you were renting. If there is a natural disaster or the neighborhood slowly goes to the dogs an owner has more sunk cost. On the other hand, if the value skyrockets and it becomes the next desirable “it” place you may get a huge influx of infrastructure/businesses with corresponding jumps in your taxes, but that can be huge for your NW. this describes what happened to my parents over the last 25 years.

B. Having a mortgage opens up the opportunity to re-finance when rates drop. Technically it CAN be done when you own the home outright, but IME it’s more complicated and less favorable terms.

edit: fixed quoting function, add clarity

[theninthwall]

It sounds like it may come down to a lifestyle decision rather than a financial one. My wife and I seem to move cities every two years and don’t plan on having kids, so renting works well for us. If we were more settled, buying would be the better option.

One thing to take into consideration is that the average American moves house every 13 years. With that comes costs. Phrases like ‘forever home’ I think have been misused by agents to convince people to spend more than they would like, on the basis that they will not have to move. Often that turns out to be the case.

[Metalcat]

It sounds like it may come down to a lifestyle decision rather than a financial one. My wife and I seem to move cities every two years and don’t plan on having kids, so renting works well for us. If we were more settled, buying would be the better option.

One thing to take into consideration is that the average American moves house every 13 years. With that comes costs. Phrases like ‘forever home’ I think have been misused by agents to convince people to spend more than they would like, on the basis that they will not have to move. Often that turns out to be the case.

I agree, I have a "forever home" because I specifically bought it with aging-in-place in mind. It extremely disability-friendly.

I don't intend to live here for decades, but I do intend to keep the property forever so as never to be priced out of this city. I essentially purchased lifetime rent-control in a high-value location. 

Owning comes with huge opportunity costs if it's not a property you can rent out easily or if you don't want to be a landlord. Being tethered to one very specific spot is a MAJOR lifestyle decision.

While never being forced to move is an amazing benefit, not being able to move without being at the mercy of the markets and incurring major costs is a HUGE limiting factor.

I personally can't stand feeling trapped in one home in one specific location. So the concept of a "forever home" feels a lot like a guided prison to me, personally.

[doneby35]

Thank you all for the responses. What I am getting from this is that buying a house shouldn’t really be a financial decision, but if I do buy, then a 7% interest loan is still better off in the long run vs buying in cash. Would there be any benefit at all paying the full amount in cash financially speaking? Things such as getting a better deal on the purchase price perhaps?

[Metalcat]

Thank you all for the responses. What I am getting from this is that buying a house shouldn’t really be a financial decision, but if I do buy, then a 7% interest loan is still better off in the long run vs buying in cash. Would there be any benefit at all paying the full amount in cash financially speaking? Things such as getting a better deal on the purchase price perhaps?

Making a cash offer, or even a 50% cash offer can be highly valuable in a hot market because a financing condition means the offer could easily fall through.

I always make a 50% cash offer, because then I still retain my right to back out if the situation is truly not financeable for some unknown reason, but removes all of the typical financing condition risk for the sellers.

I still finance it the full amount, I just don't make the offer contingent on that.

[doneby35]

Thank you all for the responses. What I am getting from this is that buying a house shouldn’t really be a financial decision, but if I do buy, then a 7% interest loan is still better off in the long run vs buying in cash. Would there be any benefit at all paying the full amount in cash financially speaking? Things such as getting a better deal on the purchase price perhaps?

Making a cash offer, or even a 50% cash offer can be highly valuable in a hot market because a financing condition means the offer could easily fall through.

I always make a 50% cash offer, because then I still retain my right to back out if the situation is truly not financeable for some unknown reason, but removes all of the typical financing condition risk for the sellers.

I still finance it the full amount, I just don't make the offer contingent on that.

@Metalcat when you say financing the full amount, that means paying the full amount in cash right?

[aloevera1]

I've been using a rent vs buy calculator, specifically this one since it is quite detailed https://michaelbluejay.com/house/rentvsbuy.html to compare buying a $150,000 home in cash vs continue renting for what currently is $13,800 per year.
Assuming a 3% inflation rate impacting rent, or any housing expenses such as maintenance and insurance in the case of buying, in addition to an assumption that the house will appreciate 3% vs 7% if the cash was invested in the S&P500 instead.
The calculator indicates that renting will be the better deal financially when paying the entire amount in cash AND looking at a 30 year window. However if I instead look at a 10 year window OR take out a loan at 7% interest rate with a 20% down payment instead of paying the entire amount in cash, buying will be the better deal. So...

1. I'm having trouble clearly understanding this. Am I really better off not paying $150,000 in cash and only put 20% down with a loan at 7% interest rate and then invest the rest?
2. Should I really assume that S&P500 will return 7%? or a more conservative 5%? a little more context is that I'm FIRE'd and if I will not be reinvesting the dividends. I assume the 7% return includes dividends being reinvested?
3. Should I even be looking at 30 years for the math or is that too long of a window?

I think assumption of rent inflation at 3% may or may not be accurate. Depending on your specific geography, rents may increase much faster than 3%. In Canada we have seen 10%+ increases year over year. It's really a function of supply and demand, not just overall inflation rate. That's highly based on the location and whether you have rent controls or not.

[Metalcat]

Thank you all for the responses. What I am getting from this is that buying a house shouldn’t really be a financial decision, but if I do buy, then a 7% interest loan is still better off in the long run vs buying in cash. Would there be any benefit at all paying the full amount in cash financially speaking? Things such as getting a better deal on the purchase price perhaps?

Making a cash offer, or even a 50% cash offer can be highly valuable in a hot market because a financing condition means the offer could easily fall through.

I always make a 50% cash offer, because then I still retain my right to back out if the situation is truly not financeable for some unknown reason, but removes all of the typical financing condition risk for the sellers.

I still finance it the full amount, I just don't make the offer contingent on that.

@Metalcat when you say financing the full amount, that means paying the full amount in cash right?

No, the opposite, financing means getting a mortgage, and by "full amount" I mean as much as the bank will let me finance it.

[Morning Glory]

On the 4% rule you will need $345k invested to continue renting. Assuming you have this already,  $150k to purchase leaves you with $195k or $7,800 per year for taxes, insurance,  and maintenance.  Buying does sound like the better deal here provided there is no insane hoa or serious repair needed.

This is how I calculate rent vs buy anyway. Mortgage vs cash is a separate question.  You can always do a smaller mortgage or even pay cash and then take a heloc if you are on the fence about it.

[doneby35]

Fantastic! I have everything I need to move forward. Thanks.