House Owning vs Renting

JonnyBravo

Hi all, this is a carry over of the discussion on Mr Matey's "Psychology of Home Owning" thread.
The discussion kind of got sidetracked into its possibly/actually more expensive to buy than rent over a long period as you can invest extra money as a renter etc.

I'm creating a new thread to avoid moving off topic on Mr Matey's.

So when I left on Wednesday I said I'd run some figures through a spreadsheet cos Harry got me thinking and I'd post them when back on Friday. Here are my results!

Oh and sorry for the long post......



First of all my assumptions. There are many…..

I’ve run with an example of buying a house for £150,000 (a nice round number close to the average)

I’ve assumed a mortgage rate of 6% and a return on investments of 8%. (The rates here don’t matter too much except the difference between them, I think they’re fairly representative but am happy to run things with other rates if people are curious!)

The payments on a 25yr mortgage @ 6% are £977 and it is this figure that I’ve used as our monthly base. I’ve assumed rental payments to be 80% of that going with a more lenient figure than the 90% Hamish suggests. (Again I’m happy to run other figures)

I’ve assumed inflation to run at 2.5% and have applied that both to the house price and to the rental prices.

I’ve run the model for 40 years assuming the house owner invests for 15 years after paying off his house (applying the same terms as the renter.)

I’ve factored in 6 moves, at years 4,8,12,16,20 and 24. I’ve done this by adding the cash equivalent to the renters investments, “giving” them £10230, £11293, £12465, £13579, £15187 and £16764 at those years (this is from £9500 base cost from Harry’s figures with inflation added)

I’ve not taken into account ongoing maintenance of a house nor moving costs for the renter….. there is a limit!!!


Now the results……


At 25 years we have the owner with no investments but with an illiquid house worth £271,309
We have a renter with (presumably) liquid investments worth £200,713

At 40 years the home owner has a house worth £392,936 and investments worth £332,338 and a renter with investments worth £400,043.


Seems like a no brainer for the owner?

Well may but maybe not.

The two biggest factors in the sum seem to be inflation and the difference I apply to the rental sum vs the mortgage and therefore the amount available to invest.

Eg (Inflation still = 2.5%) If the rent is only 75% of the mortgage (£732.75 in yr 1) we end up with a renter sitting on £611,897 of investments (at 40 yrs) vs the owner still having a house worth £392,936 and investments worth £332,338 (total £725,274)

Change the rent to 70% of the mortgage (£683.90 in yr 1) and the renter has £832,753 and is “winning”!

But when we change inflation to 3% and keep rent low at the intial £683.90 then the renter ends up with £659,197 whilst the owner ends up with a house of £475,054 and investments of £332,338 (total £807,392)



My conclusion?

It requires less figures on the edge of probability to end up with the owner appearing to be the wiser investment, but that’s the thing with probability……. Who knows what the future will hold.

Really2

Very good post.

But in reality did you do it because you have just purchased a new calculator.:)

(sorry could not resist but some good work done there old chap)

chucky

without taking your thread off topic, the non-financial and life style factors between buying and renting are pretty important. for me personally renting is good short term and long term buying is the answer in addition to your financial 'benefits' that you've highlighted.

HAMISH_MCTAVISH

JonnyBravo wrote: »

My conclusion?

It requires less figures on the edge of probability to end up with the owner appearing to be the wiser investment, but that’s the thing with probability……. Who knows what the future will hold.

It is pretty difficult to create a realistic scenario where renting beats buying.

The Times has a useful calculator here.... http://www.timesonline.co.uk/tol/money/calculators/article5771800.ece
..... that also lets you factor in inflation and return on savings.

Using some fairly realistic examples, with a 250K house, 200K mortgage, £900 rent, long term HPI of 3%, Rent increases of 2%, Mortgage at 5%, and a net (after tax) saving return of 3.5%, the buyer is better off than the renter by £305,000 after just 25 years.

chucknorris

chucky wrote: »

without taking your thread off topic, the non-financial and life style factors between buying and renting are pretty important. for me personally renting is good short term and long term buying is the answer in addition to your financial 'benefits' that you've highlighted.

Yep, as a dog lover I just couldn't put a price on having our dog with us

JonnyBravo

chucky wrote: »

without taking your thread off topic, the non-financial and life style factors between buying and renting are pretty important. for me personally renting is good short term and long term buying is the answer in addition to your financial 'benefits' that you've highlighted.

Absolutely. Harry highlighted that by saying he wouldn't be buying at all apart from those considerations as he viewed renting as cheaper. My sums tend to suggest it isn't but it is possible it could be, just very unlikely IMO.
(We should prob also really be considering 50 years not 40 with life expectany nowadays, that something else that would skew the figures towards buying)

the_ash_and_the_oak

JonnyBravo wrote: »

Hi all, this is a carry over of the discussion on Mr Matey's "Psychology of Home Owning" thread.
The discussion kind of got sidetracked into its possibly/actually more expensive to buy than rent over a long period as you can invest extra money as a renter etc.

I'm creating a new thread to avoid moving off topic on Mr Matey's.

So when I left on Wednesday I said I'd run some figures through a spreadsheet cos Harry got me thinking and I'd post them when back on Friday. Here are my results!

Oh and sorry for the long post......



First of all my assumptions. There are many…..

I’ve run with an example of buying a house for £150,000 (a nice round number close to the average)

I’ve assumed a mortgage rate of 6% and a return on investments of 8%. (The rates here don’t matter too much except the difference between them, I think they’re fairly representative but am happy to run things with other rates if people are curious!)

The payments on a 25yr mortgage @ 6% are £977 and it is this figure that I’ve used as our monthly base. I’ve assumed rental payments to be 80% of that going with a more lenient figure than the 90% Hamish suggests. (Again I’m happy to run other figures)

I’ve assumed inflation to run at 2.5% and have applied that both to the house price and to the rental prices.

I’ve run the model for 40 years assuming the house owner invests for 15 years after paying off his house (applying the same terms as the renter.)

I’ve factored in 6 moves, at years 4,8,12,16,20 and 24. I’ve done this by adding the cash equivalent to the renters investments, “giving” them £10230, £11293, £12465, £13579, £15187 and £16764 at those years (this is from £9500 base cost from Harry’s figures with inflation added)

I’ve not taken into account ongoing maintenance of a house nor moving costs for the renter….. there is a limit!!!


Now the results……


At 25 years we have the owner with no investments but with an illiquid house worth £271,309
We have a renter with (presumably) liquid investments worth £200,713

At 40 years the home owner has a house worth £392,936 and investments worth £332,338 and a renter with investments worth £400,043.


Seems like a no brainer for the owner?

Well may but maybe not.

The two biggest factors in the sum seem to be inflation and the difference I apply to the rental sum vs the mortgage and therefore the amount available to invest.

Eg (Inflation still = 2.5%) If the rent is only 75% of the mortgage (£732.75 in yr 1) we end up with a renter sitting on £611,897 of investments (at 40 yrs) vs the owner still having a house worth £392,936 and investments worth £332,338 (total £725,274)

Change the rent to 70% of the mortgage (£683.90 in yr 1) and the renter has £832,753 and is “winning”!

But when we change inflation to 3% and keep rent low at the intial £683.90 then the renter ends up with £659,197 whilst the owner ends up with a house of £475,054 and investments of £332,338 (total £807,392)



My conclusion?

It requires less figures on the edge of probability to end up with the owner appearing to be the wiser investment, but that’s the thing with probability……. Who knows what the future will hold.

Good work!

You have the results for at 25 years and 40 years but do you have the results for at 4 years and at 8 years?

IveSeenTheLight

JonnyBravo wrote: »

My conclusion?

It requires less figures on the edge of probability to end up with the owner appearing to be the wiser investment, but that’s the thing with probability……. Who knows what the future will hold.

Interesting and good post.
My query is over the figures you use being 80%, or 75% or 70% rent of the mortgage repayments.

My BTL mortgages required that the rent covers 125% of the mortgage interest

We also know the mortgage interest is akin to rent, therefore I would have to raise concerns over the figures as to the percentage of mortgage the renter pays.

If there are investors out there subsidising the mortgage, then that would appear straight away to me to be a questionable investment and not necessarily the majority of investments out there.

You do point out very well that only a small variation in inflation results in a vast difference over the term.

the_ash_and_the_oak

chucky wrote: »

without taking your thread off topic, the non-financial and life style factors between buying and renting are pretty important. for me personally renting is good short term and long term buying is the answer in addition to your financial 'benefits' that you've highlighted.

Or rent a flat buy a house imo

lostinrates

JonnyBravo wrote: »

Absolutely. Harry highlighted that by saying he wouldn't be buying at all apart from those considerations as he viewed renting as cheaper. My sums tend to suggest it isn't but it is possible it could be, just very unlikely IMO.
(We should prob also really be considering 50 years not 40 with life expectany nowadays, that something else that would skew the figures towards buying)

Is everyone going to die early now with heartattacks and diabetes in their fifties?;) I don't have a pension plan. still would like to own though, personally.

chucknorris, it is poosible though harder (and more expensive IME in UK) to rent with animals. I wouldn't be without my critters and husband either.

IveSeenTheLight

HAMISH_MCTAVISH wrote: »

It is pretty difficult to create a realistic scenario where renting beats buying.

The Times has a useful calculator here.... http://www.timesonline.co.uk/tol/money/calculators/article5771800.ece
..... that also lets you factor in inflation and return on savings.

Using some fairly realistic examples, with a 250K house, 200K mortgage, £900 rent, long term HPI of 3%, Rent increases of 2%, Mortgage at 5%, and a net (after tax) saving return of 3.5%, the buyer is better off than the renter by £305,000 after just 25 years.

Agreed this is a decent quick analysis.
Putting in the figures I had for my BTL it seems that by the second year the buyer is better off.

Of course there may be other areas in the UK in which the figures are not so beneficial to the buyer.

I believe that both Johnny's info and the Times calculator does show that property is still a worthwhile investment.