zaterdag 14 januari 2012

Buying vs Renting

Recently I had a heated discussion about which one is better: buying a house or renting a house.

I kept saying that renting a house was cheaper than buying a house and here's why:
- The government will not keep subsidizing your loan
- Housing prices will not forever keep going up faster than the rise of wages
- Gold will increase much faster than real estate due to inflation
- Taxes on property are high and will keep increasing
- Maintenance on property needs to be paid by the owner of the house 
- Mortgages will rise in interest rate and will collapse the price of houses

I found a nice site that calculates the expenses: Renting VS Buying

If we make following assumptions:
- The average rent of an appartment in Belgium: 715 euro/month (2010) (house rent)
- The average price of an appartment in Belgium: 215000 euro (2010) (house price)
- Inflation rate: 3.5%
- Mortgage interest rate 5.5%
- 30% down payment
- Rent inflation 3.5%
- Interest on investment in gold: 5%/year (gold will at least triple in price in 30 years)
- 30 year mortgage
- Maintenance 1000 euro/year
- 6450 euro closing costs 
- 2300 euro tax/year
- Depreciation of house: 1% a year (your appartment will lose value year over year due to style that gets old and due to the fact that people will pay less for a house that has been lived in for 30 years)

Buying does not become better than renting during the first 30 years.

Here's how much you're out under each scenario:
 $480,804 to buy the house.
 $189,411 from renting if you invest the difference.
 $575,490 from renting if you don't invest.

If you rent and religiously invest the difference between what you would have paid for a house and what you're paying in rent, you can earn a return of $386,078 (after taxes). This helps make renting a better deal.

$674,112$575,490Cash spent
-$206,746Home value
$13,439Closing costs on resale
$480,804$575,490Net spent
(if not investing)
(lower number wins)
-$386,078Less return on investment
$480,804$189,411Net spent
(lower number wins)

6 opmerkingen:

  1. The preferences of people actually depends on the situation. Both owning and renting can be advantageous over the other but both has some disadvantage too that those home seekers shall need to consider first and analyze on whether to rent or buy a house/property.

    texas mce

    1. Hi Dave, thanks for commenting! I agree, it depends on many things like which country you're living in, your marital status, the business cycle you're living in. Just heard an interview with Peter Schiff where he said that women tend to like owning a house because they would have some legacy to give to their kids. If the goal is to earn as much money as possible, I do think renting is better than buying a similar house, considering the period we're now living in.

  2. I see the merits of the facts you have presented to us, sir. Despite the extravagant cost of buying a house (or even building one), it's the fulfillment of a person to have an asset of their own. I rent too, but I’ve always dreamt of having my own house. But with today's economy, I guess I have to do make do with what I have.

    Zachary Shepherd

    1. One day you will be at the point where you want to settle and buy a house, that's when you will buy it. But for now I'd rather save the money to get a more modern and bigger one later on. (but actually I just want to save money to stop working as soon as possible)

  3. Getting a house is one of the investments that most people are trying to have. With this, people will be able to get a good place to live in for their entire life. One can use simple loans in fulfilling these dreams.

  4. Renting and Buying a house have advantages and disadvantages but for me it is always better to own a house because you can save more money from it.