07 October 2014

Rental or Ownership - Which Makes Sense for a Home?

Since eons, it seemed to be a given that we should strive towards owning that roof over our head that we call our home. It was imbued in our psych that this is a necessary step to ensure our well being, carrying us into our retirement. With such an asset firmly in our hands, we then need only to worry about other expenses for a healthy living and retirement.

It has also often been explained that between renting versus owning a property, the earlier leaves one with nothing, while the later produces an asset at the end of the day.

I've been thinking though, do the maths really work out right today? I own my condo, apparently valued at about $1m today. Or maybe a bit less, given the softening property market. What would it cost to rent?

Suppose I were 65 years today (or should I be thinking 67 now!?), and assuming I have 30 years to go, paying a monthly rental instead of $3,000 a month - that works out to be $1.08m in total, without accounting for the time value of money. Seems logical to own my property rather than rent, since I would have paid the equivalent sum over time?

But let's consider an alternate future. Suppose I monetise the $1m by selling off my property and then investing that $1m, generating a 4% real return on the investment, giving me $40,000 a year. That would actually be more than the $36,000 a year in rental.

Does this look a real proposition to ponder? Will the rental rate hold, or will it increase over time? With age and time, do the equations change?

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