Following up the True Cost of Owning a Home Part 1 where I broke down costs to expect after purchasing a home, We saw that in today’s dollars you can expect to spend an average of $4000 per year total on your home. We saw how this can push your monthly home cost from $1400 on a $200,000 home to $1734. This $200,000 mortgage has an APR of 4.5% with 30 year loan. We’re simulating the mortgage with zero money down and no penalty.
We’ll be looking at lots of graphs today to really break down where the money goes and what could be done with the money. I’ll try to explain everything in as much detail as possible but please ask if anything isn’t clear.
Cost of Housing
In this graph we are looking at out of pocket cost per year of owning a home vs renting an apartment. We’re still using the $200,000 home that costs $1734 per month. The home was broken down into mortgage payments which are static each year. Property taxes, insurance, maintenance cost and upgrades all go up with inflation of 2% per year. Mortgage of $200,000 gets paid off after 30 years and you can see the mortgage costs drop right off leaving you with the continued cost of property tax, insurance, maintenance and upgrades that all go up with inflation each year. The apartment I chose for this simulation costs $1000 per month and goes up every year with inflation of 2%. Sure $1000 isn’t really comparable to a $200,000 home but in my area $1000 gets you a pretty decent apartment. We could push around this number but for now I’m still being frugal and chose $1000.
In 50 years I expect the yearly cost of an apartment to cost over $30,000 and the home to cost under $20,000. It’s that drop point at 30 years that could make a home the better long term investment.
Renting an Apartment vs Owning a Home
This graph is a bit complex. The blue line is looking at if we took the money we saved from renting and not owning and invested the difference at an expected 7% return rate per year. The dent around 30 years is when owning a home becomes cheaper. But because we’ve already amassed such a large amount of money over the years through not owning(Over $500,000!) our investments are taking off on their own despite renting now costs us money instead of saving. In other words after 30 years the blue line is not adding money to investments, it’s actually subtracting and still growing due to the interest being more than the yearly rent cost.
The red line shows that from year 0 to 30 we’re not investing a dime because we only invest the money we save, since we’re not saving we’re not investing. What the home is doing from year 0 to 30 is gaining equity and the home’s value is going up with inflation. After year 30 owning the home becomes cheaper per year than renting. At that point we start investing the money we save over renting and our red line goes from linear to exponential. After year 30 the red line becomes a mix of the homes value appreciating and a little bit of money in investments going up at 7% return rate per year. Problem with the home at this point is the home equity part you’ve amassed isn’t something that can really help you retire unless you sell your home and it only goes up with inflation.
Simple $200,000 home vs $1000/month rent Conclusion
In this case of $200k home vs $1000 per month rent, renting clearly wins. But it seems pretty clear if we pushed these numbers around or add more complexity that we may get different outcomes.
In fact to get a more Apples to Apples real world comparison, tomorrow I’ll do another comparison where I compare a higher end apartment vs a $200,000 home with 20% down.
After that I’ll do a comparison of my home vs my old apartment since it’s a real world situation of low cost apartment living vs low cost home owner.
If any readers are interested in having me compare where they live vs where they want to move, drop me a message with details on my contact page.