{"id":188,"date":"2007-08-30T21:15:53","date_gmt":"2007-08-31T04:15:53","guid":{"rendered":"http:\/\/gregbaker.ca\/blog\/2007\/08\/30\/real-estate\/"},"modified":"2007-08-30T21:27:37","modified_gmt":"2007-08-31T04:27:37","slug":"real-estate","status":"publish","type":"post","link":"http:\/\/gregbaker.ca\/blog\/2007\/08\/30\/real-estate\/","title":{"rendered":"Real Estate"},"content":{"rendered":"

A while ago, I came across this rent-or-buy calculator<\/a>. 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…<\/p>\n

Option 1: Buy<\/h4>\n

Let’s buy a $400,000 home. Let’s say we get together a $50,000 down payment and mortgage $350,000.<\/p>\n

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<\/a> says that the monthly payment will be $2,542.<\/p>\n

So, after 20 years, we own our home. Apparently, home prices don’t really increase that much<\/a>, 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<\/a> says that our home will be worth $594,379.<\/p>\n

Option 2: Rent<\/h4>\n

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.<\/p>\n

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

Notes<\/h4>\n