To buy a house or to rent when you have the cash

There are many calculators and advice columns about whether to rent or to buy but every single one of those assumes you don’t have the cash to buy a house outright. In this case paying a mortgage is a way to force you to build equity and that is definitely a good thing. But what if you already have this equity in the form of cash? Let’s explore this case.

Let’s suppose you are choosing between buying a house that costs $350K or renting at $2500 a month and you expect to stay in this location for 5 years. We will assume you have the $350K in cash and you will receive $2.5K a month and any money you are not spending on housing you will invest in the market. We will assume the stock market grows at 12% per year (S&P has averaged 13.9% for the last 10 years) and that houses appreciate at 8% a year (which is reasonable for some regions of the country)

Scenario 1: You buy the house. After 5 years you should be able to sell the house for $514K and you won’t need to pay any taxes.

Now let’s see what you will be spending:

  • Taxes. Let’s assume $6K per year and suppose your house does not get reappraised. That is the tax rate in my neighborhood. $30K total
  • Maintenance: One is suppose to budget 1% of the value of the house but I think this is too high so let’s go with $2K per year for a total of $10K
  • Insurance: $700 per year for a total of $3.5K
  • Selling costs: The total here is usually 10% of the value of the house so $51K.

Total Cost: $100.5K. We need to make some assumptions here and to make the math easier we will assume you spend all of this money right after you sell the house.

Of course every month you will be investing the money you are not spending on rent into the market. We are assuming 5% annual rent increases. I needed excel for this but it turns out you will have $223K or about $216K after taxes.

In this scenario, at the end of 5 years, you will have $629K.

Scenario 2: Well, this is easier.

You don’t get to keep any of the rent money so let’s see how your investment does on the stock market. In 5 years, your $350K will be $617 K for a profit of $267K. You will have to pay about 15% in taxes but still:

In this case you will end up with $577K at the end of 5 years.

Well ladies and gentleman, the math has spoken. If you chose to rent, that will cost you $50K over 5 years. Not so bad really if you want to have the option of moving as often as you want.

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