You are better off renting now

[DimPrawn]

The idea was to invest as little of your own money as possible? gearing and all that, well done! You had the money at the time, some didn't. It can't be done now, with any sort of room for manoeuvre, the smart people are looking elsewhere for investments while some idiots are still pilling in, which is great for those getting out. Pilling in large deposits= less profit. I'd rather do what Soros does and buy at the moment of maximum pessimism, not while there is still some positivity in the market.

http://en.wikipedia.org/wiki/Bigger_fool_theory

[TimberWolf]

You can easily make this calculation. Assume I have 100k cash and want to buy a house for 400k which if I rented would cost me 1500 pounds a month. If had to get a mortgage on that for 25 years at 6.5 % it would cost me 2025.62 a month plus 100 pounds a month for maintenance plus 100 pounds a month for service charge and ground lease and all expenses that you only have as a owner. This would mean 725.62 pounds a month saved that if I invest for 25 years at a rate of 4% with the initial 100k that I didn't put down as a deposit would give me a final amount 644445.85. If your house 25 years later will be more than that then you made a profit.

I haven’t run the numbers but I think a fatal flaw in that calculation is that it doesn’t take inflation into account, which may be a bit of an oversight considering that’s where some BTL’ers intend to gain in the looonngger term (rent stays the same in real terms, mortgage repayments decrease in real terms from day 1). [You could even start off making a loss initially, expecting a gain in the future, and a paid for house]. After the first year the house’s value has roughly kept up with inflation, as will the rent. But the interest payments, while maintaining the same value numerically as at the start, become less in real terms. For example that “725.62 pounds a month saved” you mention applies to the first month, after that inflation takes a bite, and thereafter-compound ‘interest’ chips away at the rest. I think it’s clear that at some point buying would (near enough) always be better than renting, it’s just a question of how in many years. If we all got excited enough about this it'd be a simple enough matter to run some numbers numerically.

[beaker]

Short-term it's better to rent, long-term it's better to buy... surely?

I think the point is when you're 50+ and don't want to work any more it's nice to have your house paid off coz you don't want to be paying rent at that stage.

[Francko]

I haven’t run the numbers but I think a fatal flaw in that calculation is that it doesn’t take inflation into account, which may be a bit of an oversight considering that’s where some BTL’ers intend to gain in the looonngger term (rent stays the same in real terms, mortgage repayments decrease in real terms from day 1). [You could even start off making a loss initially, expecting a gain in the future, and a paid for house]. After the first year the house’s value has roughly kept up with inflation, as will the rent. But the interest payments, while maintaining the same value numerically as at the start, become less in real terms. For example that “725.62 pounds a month saved” you mention applies to the first month, after that inflation takes a bite, and thereafter-compound ‘interest’ chips away at the rest. I think it’s clear that at some point buying would (near enough) always be better than renting, it’s just a question of how in many years. If we all got excited enough about this it'd be a simple enough matter to run some numbers numerically.

Certainly it is a very simplified calculation. And you think that 100 pounds a month for maintenance is really enough? Perhaps if it's a new building for the first 3 years but then every now and then there are major expenses. Also the savings calculation only considered a 4%. Well, wouldn't you be able to get more if you have a substantial saving by diversifying the investments? Having a full amount of 500k in a savings account doesn't sound that wise. So in all I am not so sure that the difference is still that great, but yes it would require the calculation of lots of factors. It doesn't even take into consideration that for the first half of the mortgage you haven't paid back much into the mortgage as it's mostly interest. Having this big burden that you can't liquidate isn't more restrictive than investing in bonds tied for 2 or 5 years which give you well above 4%. If you bought the house in the early 90s before making a profit you had to wait for 7 years. Also the best investments are always considered according to market trends. The house market seems to be on an edge of a decline, why investing on it now? You can invest in something else now and a few years later go back to the house market when the trend is upward.

[TimberWolf]

You’d also need to subtract the rate inflation off that 4%, and as mentioned the difference you plan to invest decreases in real terms from day 1. I think a numerical calculation would be necessary, or at least much easier to do, than an algebraic solution, since as we agree there are many variables to concider. Even agreeing on the rate of inflation could be tricky, since it’s dependent on what you take into account. I agree it isn’t a good time to invest now for short-term investment, but then I guess it rarely is except in the exceptional times we’ve witnessed recently.

[Francko]

You’d also need to subtract the rate inflation off that 4%, and as mentioned the difference you plan to invest decreases in real terms from day 1. I think a numerical calculation would be necessary, or at least much easier to do, than an algebraic solution, since as we agree there are many variables to concider. Even agreeing on the rate of inflation could be tricky, since it’s dependent on what you take into account. I agree it isn’t a good time to invest now for short-term investment, but then I guess it rarely is except in the exceptional times we’ve witnessed recently.

No, the inflation is the only factor that is not influential at all. The 720 pounds you save each month is the minor cost compared to the mortgage. At the end of the 25 years you have either 650k in cash or a house that is now worth 400k and in the future nobody knows. Indeed what can have a bigger impact is the behavior of the interest rates especially if you are tied to 2 years offers. If you look at the normalised trend you will find out that the house gives you on the long run a return of 3-4%, just as much as savings account gives. What is best at a specific time it is only dependant on the context. You might argue that psychologically keeping the money in the bank is difficult while with a house you are forced not to touch that money; that I can give it to you. But apart from that is not a safe thing. There no such thing as a safe investment. Even money in the bank is not a safe thing in case of strong inflation or government/bank collapse. What I'd like to point out is that buying a house has a lot of hidden costs that people normally do not consider in the bill. Agents, taxes, solicitors, repairs, bathrooms, kitchens (at least every 3-5 years we are talking of 5-10k for both).... all of that for something that you can enjoy only after 25 years (most people don't act as good investors selling and buying at the right time just because they irrationally think that a house is a safe bet). Are you sure that those costs are so uninfuential? I wouldn't be so as from my experience of homeowner.

[sasguru]

So much talk. Basically my parents are theoretical millionaires because they bought a basic detached house in the right place at he right time.

So they are in a better position than most people in Europe who have rented all their lives.

End of story.

[bored]

Your mistake in that calculation is that you are comparing yield of a no risk fixed rate investment to the yield of a high risk investment (property). Make the comparison between property and shares and the picture will change drastically.

[TimberWolf]

No, the inflation is the only factor that is not influential at all.

Towards the end of the term those mortgage payments will cost next to nothing in real terms, because inflation rips into them. Interest is paid all during that term and one loses out there big time, especially early on, but the point is that the cost of the house also rises with inflation and partially offsets this cost. Rents rise with inflation too, and so don’t become less costly in real terms. The longer you rent the worse of you become then in this simplified model, so I don’t see how ‘inflation is not influential at all’.

Run some numbers to convince me.

[sasguru]

FFS the story is this: no one (I hope) just invests in one option. A diversified portfolio is the name of the game. Now, we all have to live somewhere. It is clearly better to buy, because after 25 years when you're old, you have somewhere to live, after maintenance. None of you has factored in, say, 15-20 years of retirement after paying off your mortgage. So buying means you stop paying during your non-income years. If you have also invested in the stock market, you will be quids in.