Author Topic: re-evaluating rent vs own  (Read 964 times)

forestj

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re-evaluating rent vs own
« on: March 19, 2016, 12:45:18 PM »
Currently I'm renting, sharing a large unit with 6 others, we are paying $300 a month each for rent and utilities. I know that interest rates are low right now. I asked the guy at my bank and he quoted me 3% for a 15 year mortgage if I do a  down-payment.

Looking around on real estate search engines like Zillow, Craigslist, Trulia, etc, there are some recently foreclosed houses listed in the 100k - 150k range.  Half of them are duplexes.  Let's say the total cost of buying the house ended up closer to $200k after fees and renovating to fix bad insulation, leaky windows, old furnace, etc.

Let's also say that the monthly cost of operating the house (utilities etc) end up around $400 on average.

If I kept my current arrangement, lots of roommates, or if I just rented one of the two units to either some friends or to some strangers, I could still charge rent, around $300 per person. Some of these houses look like they could comfortably house around 4-6 people in total.

So I could get about $900-$1500 income per month from my housemates. Then I would pay about $1200 a month on a 3% 15 year mortgage, plus the $400 utilities etc. Then throw in another $100 per month on average because there will be vacant rooms in the house sometimes, and other expenses.

I end up paying $200-$800 per month. After 15 years (or less), I would have a paid off house, with the opportunity cost of ~$15,000 down payment, $30,000 fees+renovations, plus $-100 to $500 monthly.

If I assume an average compound annual growth rate of 5% for the stock market over the next 15 years, my opportunity cost would be about $27,000 to $300,000.

Total cost over renting, including opportunity cost, would be about $85,000 to $410,000 after 15 years. (although, inflation isn't factored in anywhere)

Hmm. based on the back of the napkin calculations, there is lots of variability depending on how much I have to pay per month personally. If I was going to look into this further, I would place a laser-like focus on monthly costs and amount of rent I would be able to collect, because that's what matters most to the outcome. I would want to fully understand and minimize all monthly costs involved, including insurance, property taxes, utilities, HOA fees (if any), room vacancies, etc.

If I did pay off the house, then in the 15 years following, I would get $50,000-$200,000 in rent (not including the rent I pay to myself).
If I never bought the house, then in the next 15 years following my 15 year experiment, I could make $175,000-$850,000 in a 5%/year stock market from my $85,000 to $410,000 savings.

It looks like renting wins again, provided the market continues to return % per year to investors on average for the long haul. The only situation in which buying a house for personal use appears to make more sense, is if 15 and 30 year average investment returns approach zero. IMO if that happens, then I will have bigger problems than whether I should rent or buy.

Another reason to buy would be if I was already FIRE and wanted to diversify my investments.
« Last Edit: March 19, 2016, 01:14:07 PM by forestj »

adamcollin

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Re: re-evaluating rent vs own
« Reply #1 on: March 21, 2016, 03:01:44 AM »
 I think buying the house would be a better idea.