Rent Vs. Buy Example

[heybro]

Most of this is true but part of it has been simplified for the clarify of argument. This thread is about renting forever or owning property. The debate on whether to pay off a mortgage early or not is not part of this study (so please don't factor it in here! hehe). It is assumed that I will either change rental apartments 3 times in my life or change condos 3 times in my life (thus adding realtor/closing costs 3 times). The change will be in location and not in size/price.

p.s. I know about the rent vs buy calculators but really want to lay this out here.

I have $100,000 cash and can either:

1. Buy a condo for $100,000 effectively tying that money up forever. My expenses are $200/month association fee + $100/month property taxes and insurance + $50/month maintenance (its a very small one bedroom condo)= $350/month total. [Adding $6,000 realtor fee to change properties three times = 18k split among 30 years = $50/month extra] = $400/month total forever.

-or-

2. Rent an apartment currently costing $800/month and put that $100k in to the S+P 500 for an assumed rate of return of 4% forever which provides a credit of $333 per month making the cost of rent effectively $466/month.

So, for just 66/month more, I can have the peace of mind of living somewhere that I can move out of at the drop of a hat? Is that really true????? I feel like I'm missing something. Does the price of rent increase more than the price of property taxes/maintenance would? Would building equity (even if you'll never use it cause you are always living there be actually better?) The only problem I see is if I wanted to increase my living space but I really don't see this happening and if it did, I'd be allowed even more money to be able to rent instead.

Thank you in advance!

[jim555]

I bought a condo for cash prior to FIREing.  My logic:

Tied up money earns no interest which is an advantage for the ACA which is better with lower income.  I am able to live with a minimal budget.  Implied interest is not taxable.
Not having to deal with landlords is a big plus for me.  Can't stand nosey landlords.
Equity in real estate is protected under my state's homestead rules, so $150,000 is exempt from lawsuits.
Maint and taxes rise, but the rise is much less than rents.  Rents in my area continue to sky rocket.
Control over my destiny.  I decide when to move or not.  Hate being at the whims of a landlord who can kick you out at any time.
$250,000 capital gains exclusion for real estate.   In three years I already have about a $50,000 gain.
Improvements to the space are possible, and help the resale value.
I can rent out the place and go travelling for a year and come back.
I have no immediate plans to move, if I was more nomadic I would be a renter.

[RWD]

S+P 500 for an assumed rate of return of 4%

Why do you have such a low assumed rate of return?

[jzb11]

Where I live:

Rent per month:

$500-650

Buy per month (100k):

900 (mortgage
407 (tax)
100 (insurance)
50-200 (maintenance - if house, lawncare, snow removal, etc)
200 (association fees)

In the buy case the costs outside of mortgage or the 100k cash paid up front are enough to rent a 1 bedroom apartment.

As a single man it just doesn't make sense unless I can get a 2009 real estate crisis 200k boom home for 40k kind of deal.

[Fudge102]

S+P 500 for an assumed rate of return of 4%

Why do you have such a low assumed rate of return?

Is it not better to plan for a lower rate and just accept anything more as a bonus?  Always better to need less and have more than the other way around.

[HPstache]

Where I live:

Rent per month:

$500-650

Buy per month (100k):

900 (mortgage
407 (tax)
100 (insurance)
50-200 (maintenance - if house, lawncare, snow removal, etc)
200 (association fees)

In the buy case the costs outside of mortgage or the 100k cash paid up front are enough to rent a 1 bedroom apartment.

As a single man it just doesn't make sense unless I can get a 2009 real estate crisis 200k boom home for 40k kind of deal.

Are you considering apples to apples?  Are you saying that whoever is renting out a place for 500-650 must be losing over $1,000 per month ($1,700.mo to own it) just to rent it out?  Or are you comparing buying a house to renting an apartment/condo?

[MKinVA]

We talk about this all the time (not to imply I am tired of it, I enjoy this discussion). It really is so subjective. A friend who is retiring at age 74 this year says why would I ever buy again? I won't live long enough to sell and make a profit, such a hassle to deal with realtors, viewing properties, and probably could rent for less than buy in his targeted HCOL areas (you only live once, eh?) But here is a consideration that I find in my city and my target city for when I retire. There isn't anything for rent that I would want to live in. Or the neighborhood I want to live in. Or I can't find a place that takes dogs and I can't imagine living without a dog. So when it comes down to it, I may buy and my friend may buy simply to improve the choices and to live the way you want to live.

In general, I would love to rent and not have the taxes and repairs and maybe would want to move to keep an updated apartment, etc. But unless you live in a fairly big town, I find the rental markets very poor.

[heybro]

S+P 500 for an assumed rate of return of 4%

Why do you have such a low assumed rate of return?

Well dude, if I assume 8% that means $8,000 a year = $666/month, which makes renting an $800 apartment basically only $133/month !  versus buying which is $400/month !!!!!!!!!!!!!!!!!!!!!  Is that a valid assumption?

[RWD]

S+P 500 for an assumed rate of return of 4%

Why do you have such a low assumed rate of return?

Well dude, if I assume 8% that means $8,000 a year = $666/month, which makes renting an $800 apartment basically only $133/month !  versus buying which is $400/month !!!!!!!!!!!!!!!!!!!!!  Is that a valid assumption?

That's probably more accurate. Of course, the S&P 500 won't give you a consistent return, so short term is impossible to predict. There are other variables in play as well, like inflation. Inflation will erode your stock market return by way of rent increases. Or on the other side: association fees, property taxes, and maintenance increases.

[money_bunny]

Some other people mentioned the problems with condo's. How does being stuck in one place fit your plans? This comes up frequently.

Most landlords are not that nosy, especially if they have a good tenant who they know is a grown up. MMM type people show up and they LOVE us.