A while ago, I came across this rent-or-buy calculator. After playing around with it for a while, I learned two things: (1) I didn’t really understand what it was trying to display, and (2) the buying/renting distinction was more subtle than I thought. So, let me work through this…

#### Option 1: Buy

Let’s buy a $400,000 home. Let’s say we get together a $50,000 down payment and mortgage $350,000.

At the moment, the banks’ best lending rates are 6.25% on variable rate mortgages. Let’s assume (foolishly) that that will not increase over a 20 year mortgage. A mortgage calculator says that the monthly payment will be $2,542.

So, after 20 years, we own our home. Apparently, home prices don’t really increase that much, on average in the long-term. (I suspect the problem here is that after 20 years, your house is 20 years older, thus less desirable to potential buyers. It’s not relevant to compare new-home prices.) Let’s say the home appreciates at 2% after inflation. At the end of the mortgage, a compound interest calculator says that our home will be worth $594,379.

#### Option 2: Rent

Let’s use the mortgage payment of $2,542 per month. We rent a place for $1,500 (which should be comparable to what we could buy for $400k at the moment), and invest the other $1042. Start the investment account off with the $50,000 down-payment.

Like in my last money-related post, I’ll use 6% after inflation as the rate of return and an investment calculator gives us $649,364 after 20 years. A net worth of $55k more than if we had bought.

#### Notes

- Option 1 ignores property taxes, fees, and maintenance. Strata fees in particular are going to really add up if you’re buying a condo.
- In option 1, you might do really well if housing prices go up dramatically. Or you might get screwed. Basically, the problem is that you have a horribly diversified portfolio. You have one thing, your house, and are very susceptible to market fluctuations.
- Option 1 doesn’t take into account any improvements made that would increase the value of the house. It doesn’t count the cost of those improvements either.
- A home is about the least-liquid asset you can have. It may be worth $600k, but you have to sell it (and thus start renting) to get at that capital.
- After the 20 years, you’re definitely still paying rent in option 2.
**Option 2 assumes the discipline to invest**without the threat of the bank breaking your kneecaps.- There are probably some tax implications of buying that I don’t know about.
- There are any number of possibly-invalid assumptions there, but I’ve tried to hit a reasonable balance (except that thing about interest rates never going up: that’s nuts). The calculations are particularly sensitive to changes in the interest/return rates.

#### So…

I don’t know, really. I just needed to work an example through. I guess the message is that buying a home isn’t the be-all and end-all of investing.

We can rent, invest, and relax.