Edit: added comments as I omitted the growth of the downpayment. Also, a few people have pointed out to the NYT calculator: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html Full disclosure I had seen it before but I didn't like how it didn't allow comparing for a set level of rental cost and what the differential would be.
My wife and I live in NYC and have been reading and thinking a lot about the point of buying vs renting + investing. I ran some numbers and the advantages of buying seemed quite a bit higher than the rental option, which surprised me considering the high cost of real estate taxes and maintenance fees in that city.
I have made the following assumption for a 15 year calculation.
First the costs of each option: 1/ Renting = 5000 USD/month. If rent was to increase at an average of 2% per year, this represents a total cost of renting over the 15 years of approx 1.16m USD. 2/ Buying an apartment at a budget of 1.2m USD breaks down into $300k mortgage fees at current rate + $414k in monthly fees included maintenance and property tax (2,300/month). With tax savings on the mortgage fees, this equals to a total cost of $580k. This represents a monthly repayment of about $9k/month all inclusive.
While this doesn't include repairs, at this stage you can clearly see that the actual cost (ie a fee to someone else than me) of buying is a lot lower than the cost of renting. Even with $100k in repairs, which is fairly large, the differential is clearly better there.
I then went on to calculate the lost opportunity cost of the monthly payment money we can't invest (monthly repayments - monthly cost of rent) vs the return on the apartment: 1/ Invest the differential in stock: With a conservative 5% return on an ETF stock/VTSAX, the money invested over 15 years ($550k) would generate an compound growth of $355k for a total equity of $903k. Edit: I forgot to add the opportunity of investing the $250k downpayment, which brings the total equity to $1.42m. 2/ Own the home: with a conservative 2% annual return on the value of the home, the apartment's equity would be equal to $1.61m after 15 years, which seems reasonably feasible in a prime area of NYC.
So if I summarize: By renting I will have spent $581k more in "fees" ($1.16m money paid to someone else vs $580k in mortgage and maintenance fees), and would end up with $711k less in equity ($903k in stocks vs $1.6m home value).
I do know that there are other considerations (liquidity of the asset, having to use debt and losing flexibility in costs of living, wear and repairs, reality that the rate increases can fluctuate a lot, different tax rules), but generally speaking, while the stock investment grows, it doesn't get anywhere near gets pretty close to the return of the home, which really, really surprises me and makes me question my calculations (edit: yeah, they were off). I figured this would be the right place to ask. If the numbers are about right though, it does seem to me like buying is a more solid option than I originally thought...
Edit: my new conclusion is that returns (based on arbitrary % return for each stock and real estate) are fairly comparable and it thus becomes more of a question of personal preference.
Submitted May 20, 2019 at 04:20PM by shannister http://bit.ly/2JuPOyG
