See my post earlier in the thread. This is simply not a true statement in many areas. In my experience living in pretty much every region of the U.S. it's only true in the lowest housing cost areas and is very much influenced by past appreciation history.
Paying off mortgage
- Thread starter stevegee58
- Start date
Not true. In general, seems that in the areas with a stable demand for real estate, like global city centers, you will pay meaningfully more then rent. In areas where real estate is more volatile, you get compensated by positive rental yields. After all said and done, the former is still probably a better investment then the latter.
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It's just an example on what if rent and mortgage payments were the same. In that case, it seems kinda obvious owning is better than renting. Actually, I've been in many cities where that was true, where mortgage payments and rent were essentially the same per month. Mortgages have lots of variables too. Sometimes you can get it down with the right interest rate, term length and downpayment, to be similar to rent in a similar area. But it obviously depends on the location too.
The following paragraph describes the situation where rent payment per month is lower than mortgage.
Ultimately, I think the "universal truth" about which option is better, is to judge which option leads to one having the highest networth at the end of X number of years, do you agree?
So you have costs associated with both options. Obviously for rent, all rent is cost to the owner and never recouped. But it frees up money to invest. What is their rate of return? For the mortgage, what is the appreciation of real estate over the same period? They also have lower costs compared to renter, because a large part of their payment is retained in equity in the home.
I think if someone truly believes they can have outsized returns, on the order of 20%+ per year, then perhaps renting a super cheap place and investing is better than owning and investing less. Ultimately, because noone can say for certain what their investment or real estate returns are in the future, the old wisdom rings true I think. Diversification. Which is why rich people can afford to do both. Own and invest and not have to choose between putting all eggs in either basket.
I did not think this was at all possible, anywhere. Can you provide an authoritative list of cities/countries?
i found these interesting..
http://www.imf.org/external/research/housing/
https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities
http://www.imf.org/external/research/housing/
https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities
That's a great quantification of exactly what I was saying, thanks!
Ooh nice. I just forwarded the links to Mrs. G.
Here is one example of having your cake and eat it too:
I am using it just as an example, not necessarily an exact outcome.
1. You are 65 and ready to retire.
2. You borrow a conformal mortgage of $415,000, monthly mortgage + principal = $1981 per month (mortgage interest is 4% fixed, today's prevailing rate).
3. You use the $415,000 to buy an immediate annuity with the following terms: lifetime payment + return of principal. Meaning you receive the payment for life, your beneficiary will receive the $415,000 upon your passing. Your monthly income is $2,730 per month. This info came from Charles Schwab website. So, annual "income" = $32,760
4. Your expense, first year initial interest payment ~ $1383.33 pre month or ~$16,600. The rest of the $1981 monthly or $7,172 a year goes into principal for a principal reduction.
5. Monthly difference between income and expense is $1,347 or yearly net income of $16.164.
6. After subtracting principal payment, annual gain is $23,332 or a monthly income of $1,944. That is a "guaranteed" return of 5.6%.
You should be able to calculate the payout and benefit exactly using Excel and perhaps a Monte Carlo engine factored in exact interest expenses, principal payment schedule, life expectancy, tax rate and inflation rate.
I did this exercise to demonstrate that sometimes the obvious is not so obvious and the "conservative" may not be so conservative.
What is the catch? How can you have a "free lunch"? The answer in my opinion lies in the fact that:
1. Mortgage rate of 4% is historical low. Insurance company actuary factored in much higher rates for the future so can afford higher payout.
2. This is an insurance policy and the insurance company is depending on a combinations of payout options, some choose life without return of principal, some with partial returns and some 10-20 years certain.... And some of us die young and early to help pay for those that live a long time.
Good luck and best wishes.
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You mean you hand out 415000usd to Schwab and they start paying you 2730 per month, which is a 7.89% per year interest, while still guaranteing return of the principal upon your passing ?
One of us must have read wrong.
As of the price to rent ratio in the link above, it's calculated on a 1000usd a month basis, which is an extremely small surface in expensive cities, the ratio should be even higher for larger apartments.
Anyway my experience over the last 10 years in expensive cities and long term higher end rentals, is this ratio hovering between 30 to 100, considering the management fees are to be paid either way when one is renting or owning the unit, and this ratio just got higher along the rental (upon moving to more expensive house/apartment).
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Ouch, I see my mistake: The default start date was set for 2022 in effect, a defer annuity instead of an immediate. Teach me to check my calculations and when the answer is too good to be true, it probably is. Good catch.
Here is the link:
http://www.schwab.com/public/schwab...ncome_annuity/fixed_income_annuity_calculator
For an immediate annuity start date Feb 2017: Monthly income payment now equal monthly mortgage payment. So you basically get a return of your principal every year. First year is $7,172 or 1.7%. Second year and subsequent year's return will be higher. And after your passing, your heir will get the principal back.
Regards,