Renting vs. Owning Property
So I want to compare the cost of renting versus buying a property in Mountain View, CA. It seems like a lot of people in their 20s in apartments because of three main factors: temporary housing location (they aren’t thinking long term), financial instability (not enough money in the bank to make a safe investment without worry of foreclosure), and unable to pay the hefty down payment. As those 3 factors are all very important and stop most people from even considering to buying a property in their 20s, let’s assume someone has enough money and a nice, stable job. They may want a housemate for cheaper pricing and not as much boredom.. who likes living alone anyways.
Lets consider choice A (http://www.zillow.com/homes/for_sale/Mountain-View-CA/apartment_duplex_type/2103375732_zpid/32999_rid/2-_beds/0-800000_price/0-2933_mp/days_sort/37.495699,-121.930733,37.310789,-122.23114_rect/11_zm/1_fr/):
This is a 2 bedroom, 2 bath apartment, 800 square feet for about $2600/mo. With 1 housemate, this person’s monthly burden would be $1300/mo + other essential housing costs (electricity, cable, etc.).
This is a slightly nicer 2 bedroom, 2 bath condo, 1105 square feet for $669,000.
Now let’s investigate choice B… let’s assume you pay 10% down payment($66,900). The monthly mortgage comes out to approximately $2500/mo + 1.25% on property tax so overall monthly cost will be $3200/mo. Now if you get the same housemate for $1300/month, your monthly burden will be $1900/month. Now if you do this for 30 years (I know this is not practical, but play along), 12 * 30 * 1900 = 684k + your down payment of (about 67K) = $751K. So you pay 751K with a housemate for a 669K property how does that work? Sounds shitty? Think again.
You pay heavily on INTEREST because you are borrowing such a substantial amount. The good part is that on average, real estate appreciates 8.6% (from 1976–2004). This means after 30 years your property is worth a whopping 7.94M. Yeah, you pay 751K over 30 years to get back 7.94M as well as not spend money on housing on apartments. A much more conservative appreciation of the property would be half of that, 4.3% which would make your property worth 2.37M. Either way, sounds amazing right? Choice A would have been 1300 * 12 * 30 = 468K in loss without any real estate ownership. You would spend 283K less (751k — 468K) over 30 years, so to be fair, let’s assume you invest that in stocks and get a 4.3% return annually (assumed same as real estate appreciation). This comes out to exactly 1M over 30 years, minus your rent payment of 468K over 30 years is 532k over 30 years.
So if you compare the two, you have 2.37M with choice B, and 532K with choice A. Choice B is 1.83M over 30 years more which comes out to 61K/ year. Quite a nice side income isn’t it? It seems evident that investing in a property as early as possible can have a huge financial upside. Please keep in mind that financial stability is huge and one must make sure he/she can afford a property as it is a HUGE, long-term (unless you flip houses of course, but that’s a completely different ball game) investment. As property value increases over time, so do the rents in places, so 30 years later, you would not be charging a housemate $1300/mo in rent, but something probably more than your entire mortgage itself. Same with paying rent without owning a property, making buying a property earlier even more profitable. Also, there are rules that can make you avoid capital gain tax, which can be huge if it is a long term investment.
Here are some recap on the numbers:
Financial burden for choice A: $1300/mo
Financial burden for choice B: $66,900 + $1900/mo + possibility of the burden increasing to $3200 if your housemate wants to leave (until you find another housemate again).
Choice B will make you 1.83M over 30 years more than Choice A.
Bottom Line: I believe that if one has financial stability and can afford to buy a place, he/she should do so as early as comfortably possible. Then live with a housemate until one wants to start a family or move to a different location. Then the whole house could easily be put up for lease for market value which is usually very close to the mortgage value. I’ve heard of several cases where the money coming in from leasing out the house >= mortgage of the house + property tax. This essentially means that someone else is paying to build your property and you get a little bit of cash in your pocket as well.
Please be critical and give me your opinion on this topic ☺
