We've been looking at our long term plans for our condo and I have read lots of articles (
here,
here,
here, and
here) about long term investments, specifically real estate investments.
A lot of the articles show that real estate (when adjusted for inflation) doesn't have a great return, between 1-3% a year. That doesn't seem like a great long term investment plan, especially when you compare it to a generic index fund. For example, Vanguard's "500 Index" has had a 10.38% return since it's inception in 1976, adjusted for inflation that'd only be around 6-7% return. Already a index fund is returning 3-5% better each year, but there's more to the cost of a home than it's selling price and while investing you still need a place to live.
In my mind the best part about buying a house is that you get the dividends from someone elses investment. For the example of a 300k house, even though you've only put in a small down payment (50k) and monthly mortgage payment, you get a 300k investment that's growing. A small return on 300k might be better than a moderated return on a 50k investment.
In order to make a fair comparision I wanted to look at the cost of owning a home (sale price, insurance, taxes, maintenance) compared to renting a home and investing the difference between the total cost of a home minus the rental price. I've seen a lot of sites look at part of the equation, but not take EVERYTHING into account. So I made an excel sheet (
here) factoring in everything, letting me adjust inflation, appreciation, investment returns, mortgage amount, mortgage length, down payment.
My conclusion is that buying a home can still be a good decision, but renting/investing can be just as good. It all depends on how the markets act in the future, which is impossible to know. I think we'll come out ahead because our condo is near city creek, which will hopefully make us an outlier with higher appreciation. Oh well, we'll see.
Download the excel and play around with it, it's pretty neat to see. The column on the far right shows the difference in net value between renting/owning. Black numbers mean renting is better, red numbers mean owning is better. You should be able to download it
here. (I don't know how to upload files to blogger, so i had to make a google site to host it)