Saturday, February 9, 2008

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Rent or Buy ? A Financial Analysis

The conventional wisdom goes like that: Surely paying rent can’t help to make you rich?! If you buy a flat, the mortgage is for your own property. It’s like paying to yourself. However, with soaring property price, home searchers are beginning to ask otherwise. Here we'll do a financial analysis.

As an illustration, let's consider the example given below:

In the example, we assume a property of price $500,000 with mortgage at 6% (average over a loan period of 30 years), rent at 3%, the property appreciates at 4% and the return from your alternative investment at 10%. At the end of 30 years, the property is worthed $1,599,326 and the alternative investment yields $2,632,193. In this scenario, we should therefore rent and invest our money.

As a simple illustration, we shall vary only the rate of property appreciation and keep all other factors unchanged. We now change the property appreciation to 5% and the result is as shown below:

The analysis shows that property is now worthed $2,058,068 at the end of 30 years and the alternative investment yields $2,206,782. In this scenario, the alternative investment continues to give a higher gain but the amount is far less significant than before. In which case, you may want to consider other non-financial factors instead.

Finally, we increaste the rate of property appreciation to 6%.

In this case, the property value far exceeds the alternative investment, and you should therefore buy.

You may do your own custom analysis using the excel file given here: Rent or Buy? A financial analysis. Replace the figures for mortgage rate, rent, alternative investment etc. at the top of the excel sheet with whatever figures that you consider realistic for your own situation.


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Dear visitors:
Your comments are most welcome!

The blogger here has been affectionately named by close allies as "Smart Buyer" but really, he's not smart. Smart Buyer just believes that being prudent is smart. That's the essence of the message of this blog and Smart Buyer hopes it'll benefit other property buyers.

Smart Buyer :)