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Maths of buying vs renting, which is cheaper?


AlfredTheLittle
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AlfredTheLittle

I'm in my mid 40s, I have some money saved which I've been intending to use to buy a house, but circumstances have changed and it looks like I'll be renting instead. 

By my fairly simplistic maths, I would calculate that I could be better off renting than buying in any case, based on the following:

Money available: £200,000

Remaining life: 40 years

1. Cost of buying a house:

£200,000

2. Cost of renting:

£1,000 per month x 40 years = £480,000

Less dividends received from £200k invested (assuming 3% pa for 40 years) -240,000

Total cost of renting: £240,000

Using 3% return on £200k invested, buying wins, but not by much. If 4% return is assumed, renting would cost £160,000, so would win by £40k

The problem with this calculation is that rent won't still be £1,000 pm in 40 years' time. If both the rent and the dividends are compounded at 3% per year buying ends up loads cheaper, because the rent figure being compounded is higher than the dividend figure being compounded.

I think the takeaway is that renting would probably be cheaper than buying if you've got investments generating returns which equal the rent, particularly at the moment when surely there must be a big risk of a housing market crash. Also, you want to compound your dividends rather than use them to pay the rent, so renting wouldn't necessarily be a good retirement strategy.

Anyone got any views?

 

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Wight Flight
2 hours ago, AlfredTheLittle said:

I'm in my mid 40s, I have some money saved which I've been intending to use to buy a house, but circumstances have changed and it looks like I'll be renting instead. 

By my fairly simplistic maths, I would calculate that I could be better off renting than buying in any case, based on the following:

Money available: £200,000

Remaining life: 40 years

1. Cost of buying a house:

£200,000

2. Cost of renting:

£1,000 per month x 40 years = £480,000

Less dividends received from £200k invested (assuming 3% pa for 40 years) -240,000

Total cost of renting: £240,000

Using 3% return on £200k invested, buying wins, but not by much. If 4% return is assumed, renting would cost £160,000, so would win by £40k

The problem with this calculation is that rent won't still be £1,000 pm in 40 years' time. If both the rent and the dividends are compounded at 3% per year buying ends up loads cheaper, because the rent figure being compounded is higher than the dividend figure being compounded.

I think the takeaway is that renting would probably be cheaper than buying if you've got investments generating returns which equal the rent, particularly at the moment when surely there must be a big risk of a housing market crash. Also, you want to compound your dividends rather than use them to pay the rent, so renting wouldn't necessarily be a good retirement strategy.

Anyone got any views?

 

Do you really think it will cost £1k per month to rent a £200k house.

I am paying £1,150 for a £650k house.

Re-do the maths on those numbers and see how much sense it makes.

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nirvana
8 hours ago, Wight Flight said:

I am paying £1,150 for a £650k house

methinks you got really lucky there, my neighbour was getting £1500 for his £500k house in Shadwell and that was over 10 years ago!!

@AlfredTheLittleBuild a 2 bed house in Thailand for <10k, then use the interest on your investments for massages and BJs........

Go cycling with me, live happily ever after :P

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Wight Flight
53 minutes ago, nirvana said:

methinks you got really lucky there, my neighbour was getting £1500 for his £500k house in Shadwell and that was over 10 years ago!!

@AlfredTheLittleBuild a 2 bed house in Thailand for <10k, then use the interest on your investments for massages and BJs........

Go cycling with me, live happily ever after :P

Maybe. However my last one was £900 for a place that sold for £500k.

But the financial aspect is only one side. Security of tenure is a key consideration.

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AlfredTheLittle
9 hours ago, Wight Flight said:

Do you really think it will cost £1k per month to rent a £200k house.

I am paying £1,150 for a £650k house.

Re-do the maths on those numbers and see how much sense it makes.

Agree completely, but if I was buying I'd be paying £200k, because that's what I've got. The house I rent will cost £1k a month, because the ones under that aren't very nice 🙂

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AlfredTheLittle
1 hour ago, nirvana said:

 

@AlfredTheLittleBuild a 2 bed house in Thailand for <10k, then use the interest on your investments for massages and BJs........

Go cycling with me, live happily ever after :P

That sounds like the perfect life, maybe I can join you in five years or so, when my son is grown up 🙂

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Wight Flight
23 minutes ago, AlfredTheLittle said:

Agree completely, but if I was buying I'd be paying £200k, because that's what I've got. The house I rent will cost £1k a month, because the ones under that aren't very nice 🙂

Agreed, that is the problem. You need to pay about £200 above the local housing allowance rate to escape the shit homes and areas.

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If you are still talking about Darlo, your immediate issue is that a £1000 a month property to rent is a £300,000+ property to buy. 

 

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Frank Hovis

There are so many advantages to buying that I would say do so as long as you are buying somewhere you will be happy to live in indefinitely.

Starters:

Invisible for means testing - if you lose you job and try to claim benefits with £200k in dividends then it's six months NI-based JSA at £74 a week and that's that.

No landlord, letting agent, inspections, notice to quit.

Most people expend a huge amount of mental effort in deciding when / what / where to buy; if you see somewhere you like and have the means then just go ahead and do it.

Government finances of the western economies are going to require an extended period of higher infmation and low interest rates.  Rents will rise with slalaries; mortgage interest payments won't.

With you own house you can make practical investments which will add value - new roof, patio - or even save you money - insulation, solar panels.

 

There are of course downsides but generally the upsides far outweigh them as long as you are happy to live there indefinitely rather than expecting to move in the next few years.

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Don Coglione
14 hours ago, Wight Flight said:

Do you really think it will cost £1k per month to rent a £200k house.

I am paying £1,150 for a £650k house.

Re-do the maths on those numbers and see how much sense it makes.

I know that the Isle of Wight has a reputation for being somewhat backward but, as has been stated before, why the fuck aren't landlords putting up the rents, in the face of such great demand? Surely your house should be renting at £2k+ per month? I posted on the other thread that a shit, £400-425k house identical to the one that we vacated in March has rented for £1600; in fact I know the father of the tenant and he is extremely worried that they can't afford to keep paying that level of rent.

Ten years ago, I was paying £1000 per month to rent a £165k flat.

It would appear that the Isle of Wight is a renter's paradise, assuming they can find a property in the first place.

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Don Coglione
5 minutes ago, Frank Hovis said:

There are so many advantages to buying that I would say do so as long as you are buying somewhere you will be happy to live in indefinitely.

Starters:

Invisible for means testing - if you lose you job and try to claim benefits with £200k in dividends then it's six months NI-based JSA at £74 a week and that's that.

No landlord, letting agent, inspections, notice to quit.

Most people expend a huge amount of mental effort in deciding when / what / where to buy; if you see somewhere you like and have the means then just go ahead and do it.

Government finances of the western economies are going to require an extended period of higher infmation and low interest rates.  Rents will rise with slalaries; mortgage interest payments won't.

With you own house you can make practical investments which will add value - new roof, patio - or even save you money - insulation, solar panels.

 

There are of course downsides but generally the upsides far outweigh them as long as you are happy to live there indefinitely rather than expecting to move in the next few years.

All good points, Frank, which were highlighted ad nauseum to the retards on hpc, only to be met with cries of "BTLer!"; "Troll!"; "Estate agent!" (at least one of whom has returned to skulk on here...).

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Wight Flight
2 minutes ago, Don Coglione said:

I know that the Isle of Wight has a reputation for being somewhat backward but, as has been stated before, why the fuck aren't landlords putting up the rents, in the face of such great demand? Surely your house should be renting at £2k+ per month? I posted on the other thread that a shit, £400-425k house identical to the one that we vacated in March has rented for £1600; in fact I know the father of the tenant and he is extremely worried that they can't afford to keep paying that level of rent.

Ten years ago, I was paying £1000 per month to rent a £165k flat.

It would appear that the Isle of Wight is a renter's paradise, assuming they can find a property in the first place.

It has changed a bit in recent times with London money coming over, but basically there are very, very few high paying jobs on the Island.

A place I looked at two years ago at £900 is back on now for £1500. It will rent as there are plenty that have sold in London and need something while they wait to buy, but long term you can only rent for what local wages can afford.

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Don Coglione
1 minute ago, Wight Flight said:

It has changed a bit in recent times with London money coming over, but basically there are very, very few high paying jobs on the Island.

A place I looked at two years ago at £900 is back on now for £1500. It will rent as there are plenty that have sold in London and need something while they wait to buy, but long term you can only rent for what local wages can afford.

I suspect (unfortunately for you) that the influx of city money will see rents continue to inflate and that this will not be transient. In any event, why would you not sell that house, trouser the £650k and forego the potential hassle of having to deal with anyone scummy enough to have to rent a home for such a paltry yield?

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Wight Flight
3 minutes ago, Don Coglione said:

I suspect (unfortunately for you) that the influx of city money will see rents continue to inflate and that this will not be transient. In any event, why would you not sell that house, trouser the £650k and forego the potential hassle of having to deal with anyone scummy enough to have to rent a home for such a paltry yield?

That is what most have realised, which is why so many have sold.

Those that haven't are holding out for even more mad gains.

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Don Coglione
6 minutes ago, Wight Flight said:

That is what most have realised, which is why so many have sold.

Those that haven't are holding out for even more mad gains.

The only way that society can balance this out, enabling the lower-paid to live in such an area, is for employers to provide accommodation, as was the case throughout much of history, be they land, factory or mine owners then; care-homes, supermarkets or facilities companies today. We did this almost 20 years ago and solved our labour problem overnight (granted with a lot of imports, but that was a function of the uselessness of the natives and the generosity of the benefits system).

In theory, the council could and almost certainly should be doing similar, but they are too fucked by pension obligations and their own festering incompetence to be relied upon actually to help their taxpayers.

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Wight Flight
25 minutes ago, Don Coglione said:

The only way that society can balance this out, enabling the lower-paid to live in such an area, is for employers to provide accommodation, as was the case throughout much of history, be they land, factory or mine owners then; care-homes, supermarkets or facilities companies today. We did this almost 20 years ago and solved our labour problem overnight (granted with a lot of imports, but that was a function of the uselessness of the natives and the generosity of the benefits system).

In theory, the council could and almost certainly should be doing similar, but they are too fucked by pension obligations and their own festering incompetence to be relied upon actually to help their taxpayers.

I agree. We have a holiday apartment site near us where the developer ran out of money. 90% built, in one of the nicest parts of the Island. Probably 40+ two bed flats.

The council should buy it, finish it and house key workers.

But they won't, as they don't understand the problem.

However, we have hijacked the thread. This should be in the rental in Cornwall debate.

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Wight Flight

Back on topic.

The issue I face is that rent roughly equals mortgage interest.

Let's assume a £400k property is somewhere I would like to see out my days. Rent on that will be about £1k per month.

I could get a 20 year mortgage, where I still have to pay £1k per month interest, but also £1800 capital repayment. 

The difference is that at the end, just as I am about to die, I own a house. Which is of little use to a dead me.

I think they are in their infancy, but I can see never ending interest only mortgages being offered to the over 60s.

That would suit me, but may, yet again, fuck up house prices.

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Don Coglione
5 minutes ago, Wight Flight said:

Back on topic.

The issue I face is that rent roughly equals mortgage interest.

Let's assume a £400k property is somewhere I would like to see out my days. Rent on that will be about £1k per month.

I could get a 20 year mortgage, where I still have to pay £1k per month interest, but also £1800 capital repayment. 

The difference is that at the end, just as I am about to die, I own a house. Which is of little use to a dead me.

I think they are in their infancy, but I can see never ending interest only mortgages being offered to the over 60s.

That would suit me, but may, yet again, fuck up house prices.

I think it is likely that some hybrid of equity release (for those who have paid off their mortgage) and perpetual interest-only product (for those who haven't) will be made available to the likes of thee (and, as it happens, me) in our dotage, yes.

You would appear to be somewhat unusual in that you have children but (from the above) have no interest in leaving them a property when you cark it. Most people want to protect and pass on that "equity" to their offspring at all costs. I think most are likely to be disappointed in the not-too-distant future; after all, there are billions, if not trillions, locked up in housing and what better way to resolve the public debt crisis than for the state to get its mitts on that equity, doubtless under the guise of it being released into the wider economy for the greater good?

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Wight Flight
4 minutes ago, Don Coglione said:

I think it is likely that some hybrid of equity release (for those who have paid off their mortgage) and perpetual interest-only product (for those who haven't) will be made available to the likes of thee (and, as it happens, me) in our dotage, yes.

You would appear to be somewhat unusual in that you have children but (from the above) have no interest in leaving them a property when you cark it. Most people want to protect and pass on that "equity" to their offspring at all costs. I think most are likely to be disappointed in the not-too-distant future; after all, there are billions, if not trillions, locked up in housing and what better way to resolve the public debt crisis than for the state to get its mitts on that equity, doubtless under the guise of it being released into the wider economy for the greater good?

One of the reasons I don't own a house is my children.

I have done/spent everything I can to ensure that they will be in a position to earn enough to have a great life under their own steam.

If I have got it right, by the time I keel over they will have no need of an inheritance. 

I think that is the way it should be. It also means they have no incentive to bump me off early, and if they stay in contact it is because they want to.

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Green Devil

One of the biggest disadvantages of owning is miserable neighbours. Youre lucky if they arent complete wankers or noisy bastards(then amd their dogs) . In a rental you can just pack a suitcase and move. 

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Hancock

@AlfredTheLittle As youve a kid i'd just bite the bullet and buy somewhere ... im in a similar position in that ive a 11yo who i raise alone, so stability is priority. (though im intending to leave this shithole)

Avoid the headaches of landlords and being unsettled ... and in the long term owning is cheaper.

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nirvana
23 minutes ago, Hancock said:

so stability is priority

dunno what you think 'stability' is but the whole fecking system appears to be built on sinking sand at the mo

AND I'm sure you can have stability in a rental.......kids like adventures in any case :)

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Hancock
1 hour ago, nirvana said:

dunno what you think 'stability' is but the whole fecking system appears to be built on sinking sand at the mo

AND I'm sure you can have stability in a rental.......kids like adventures in any case :)

If i had bought a house around the time HTB was introduced, me and the kid would be far more settled. I went away working for a couple of months  when it was announced and by the time i got back prices were up 10/15% ... then it was rabbit in the headlight time!

I had one of our little chats with my kid the other week which relates your comment about adventure .. i apologised for not being able to give her the perfect settled life, like her friend round the corner has .... but then said at least you're childhood will be more of an adventure, when we go to Bangkok.

She seems happy and is 100% bang up for going to school over there and living a different way of life.

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Hancock
2 hours ago, Green Devil said:

One of the biggest disadvantages of owning is miserable neighbours. Youre lucky if they arent complete wankers or noisy bastards(then amd their dogs) . In a rental you can just pack a suitcase and move. 

Easier said than done if you've a kid in school.

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26 minutes ago, Hancock said:

If i had bought a house around the time HTB was introduced, me and the kid would be far more settled. I went away working for a couple of months  when it was announced and by the time i got back prices were up 10/15% ... then it was rabbit in the headlight time!

I had one of our little chats with my kid the other week which relates your comment about adventure .. i apologised for not being able to give her the perfect settled life, like her friend round the corner has .... but then said at least you're childhood will be more of an adventure, when we go to Bangkok.

She seems happy and is 100% bang up for going to school over there and living a different way of life.

Fan fuckin tastic. Good luck, and makes me happy your kids got it.

"It " being a great attitude to living. Brilliant.

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