Author Topic: Not buying home will get richer?  (Read 925 times)

chan0123

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Not buying home will get richer?
« on: January 11, 2017, 10:34:19 PM »
I recently view an article talking about not buying home will get them richer:

http://www.cbc.ca/news/business/house-investment-wealth-1.3716641

Then I found their original post, I did some comment and calculations to show author that buying a home in their case WILL make them richer, couple rounds of comments, but after that, have not get any comments. Would like to see if my calculation is correct or not. The main point they miss is the leverage part of real estate. It is pretty long, so bare with me.

You can see my comments at the bottom of the post.
http://www.millennial-revolution.com/rent/bought-house-back-2012/

So, in terms of comparison. There are two approaches for a $500k investment:
(A). Buy a house for $100k downpayment, $400k invest to stock/others.
(B). $500k invest to stock/others.

To make it simpler, just need to compare $100k downpayment for house, and $100k investment, as the remaining $400k is the same.

(A)Paid $100k for down-payment for a $500k house
Putting the numbers into a mortgage calculator, a 400K mortgage at 4% interest amortized at 25 years, gives you a monthly payment of $2104 ($796 principal ,$1308 interest).
So you’d get:
mortgage: $2104 ($796 principal ,$1308 interest)
property tax (1.1% of house price in California) $460
Insurance $800/12 = $70
Maintenance: $400
Total monthly: $3034
paid $3034 a month (including all mortgage, interest, property tax, maintenance and expense)
At the end:
We have our $100,000 downpayment and the equity we built in the house over 3 years:
So that’s $100,000 + $796 (principal of mortgage pymt) * 36 = $128,656
equity gain: $93,884 (after agent fee) [this number is from the article]
For house: you get back: $93,884 + $128,656 = $222,540

(B)For investment:
Paid $100k initially for investment
To make it equal, for paying $3034 for a month.
paid $ 1995 (rent) + $1039 (investment account)
we can invest $100K + $1039/month over 3 years. Assuming returns of 7%, 8.39%, 8.1%, we get a total net worth of $167,508

House$222,540
Investment$167,508

Looking for someone patiently follow the math.


WerKater

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Re: Not buying home will get richer?
« Reply #1 on: January 12, 2017, 04:16:18 AM »
I am currently too lazy to actually do all the math, so let me just point out this:

equity gain: $93,884 (after agent fee) [this number is from the article]
This is a magic-factor (as in this).

If the house does appreciate that much in 3 years, the result is probably correct. If. Note that we are talking an 18.6% increase.
(And the difference in outcome is smaller than this number, so the result of the analysis is completely driven by this one assumption).
« Last Edit: January 12, 2017, 04:19:15 AM by WerKater »