First post here, hopefully I don't break any rules... There are constant discussions going into renting vs buying, but most of it deals in theory. I wanted to share my personal experience with this topic, from the perspective of someone living in the Bay Area, and get feedback from the sub in case I made some wrong calculations in here.
The general perception seems to be that a) index investing and home investing are about equal in terms of returns / attractiveness, but as a commenter pointed out on the /financialindependence subreddit today, the answer is nuanced as it depends heavily on location: https://www.reddit.com/r/financialindependence/comments/8mny4i/what_is_with_the_hate_of_real_estate_on_this/ b) cash flow is generally the key consideration I see when comparing renting vs buying, or at least is what is typically modeled financially. I'm here to present some information based on my personal experience about those 2 topics today.
I bought a single family home in San Francisco in October 2016, after renting in a rent-controlled apartment for the 2 prior years. Prior to this, I had been of the mind that I wasn't giving up much by renting, but when I ran the numbers... boy was I wrong. So I bought a house instead!
Monthly housing expenditures
Renting situation:
| Category | $ |
|---|---|
| Rent | -$3,200 |
| Utilities | -$150 |
| Insurance | Uninsured |
| Total monthly cashflow | -$3,350 |
Buying a house in the Sunset (4BR, 2BA):
| Category | $ |
|---|---|
| Price | $1,325,000 |
| Down payment | $260,000 (20%) |
| Interest rate | 3.25% 30yr fixed (Got in at a great time!) |
| Monthly mortgage | -$4,635 |
| Insurance, Tax, Utilities | -$2,077 |
| Tax deduction on interest | $1,300 |
| Rental income from downstairs in-law | $1,400 |
| Total monthly cashflow | -$4,012 |
As you can see, with the benefit from tax deductions and renting a room, it ends up not being too different, even in a place like the Bay Area where the rent to price ratio favours renting.
Income through investing
I had to put down 260,000 for the house (plus some closing costs), which would have otherwise gone into some of the hottest years of the stock market, but buying still yielded substantially higher returns. Most of the reason here is due to the impact of leverage, but these (real) numbers really show the scale of this.
Here's how it has shaped up after 19 months:
| Buying | Renting | |
|---|---|---|
| Money invested | $260,000 | $260,000 |
| Expected yearly appreciation | 14% (avg last 4 yrs was 18%) | 20% |
| Actual yearly appreciation | 14% | 25% (NASDAQ index) |
| Appreciation $ after 19 months | $305,000 | $112,917 |
| Plus Principle acquired | $34,084 | $0 |
| Taxes / closing costs | -$81,500 (5% closing cost) | -$27,439 (federal + CA tax) |
| Net gain | $257,584 | $85,478 |
| % return in 19 months | 100% | 33% |
| % annualized returns | 55% | 20% |
Buying turned out to be a way better financial decision for me. And I'd argue that it will likely pull away even further from stocks after a few more years of appreciation. If the housing market slows, I'd likely explore refinancing to purchase properties in higher growth areas.
I've been keeping an eye out for purchasing investment properties as a result. After spending time modeling various property scenarios, my realization is that appreciation can be a much more significant wealth generator. It's a bit puzzling to me that so many investment property spreadsheets only account for rental income vs appreciation. I'd love to hear from you guys on what your thoughts are on my analysis - is there something I'm missing?
EDIT: Some great comments. Adding in a few takeways on how to improve the model here:
-
Account for rental income tax
-
Tax deduction I have is probably around right, but it actually includes property tax deductions also. This is impacted in 2018 onwards thanks to tax changes. From what I could tell from tax calculators, my loss in deductions is made up for by lower tax rates in general, so it evens out.
-
Maintenance costs should be included too.
Assuming roughly $1000 for rental income tax, and maintenance per month (is that too low/high?), that brings the cashflow to being -$1,700 worse than renting, which is about $20k per year. This would have cost me around $5000 of stock appreciation per year, assuming 25% yearly returns. I'll have to update my model to see the impact, which back of the napkin suggests it would boost returns in the rental scenario from 33% to 40-45% over 19 months. (Likely on the lower end, given there's the question of taxes on stock appreciation, the fact that this money would not be invested once a year at the beginning of each year, etc).
I think it would be really interesting to run some numbers to see what I'd have to believe about home appreciation and stock appreciation to believe that stocks would have won out for me. This would be a fairer way to compare the two scenarios in the "what if there's a recession" argument, as a recession would hit both stocks and home values.
Submitted May 28, 2018 at 04:55PM by mack33g https://ift.tt/2JcMpnv
