• Question
  • Is it better to rent an apartment by paying $1900 per month? Or is it better to purchase a house by

    Asked by a 47 year old man from Palo Alto, CA on 3/7/2013

    Is it better to rent an apartment by paying $1900 per month? Or is it better to purchase a house by taking a mortgage for $1.1 Million at 2.75% interest rate for a $1.4 million house? In the latter case, monthly expense will come to be about at least $6030 including taxes/insurance/utilities. If I go for the renting option, I can investment about $4200 each month into mutual funds. But, with real estate purchase, I can profit from leverage as house value appreciates. Which is the best option for growing capital if I'm 20 years from retirement? I assume that I may not be selling the house during this 20 year duration.

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  • Categories: Housing, Maximizing Returns, Retirement Planning, Retirement Assets and Savings

Answers

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  • This is an interesting question.

    Real estate typically appreciates at the same rate wages do, which is the same rate of inflation. If we assume inflation averages at 3% a year, then when you turn 66 your home will have appreciated to $2,454,000. With a purchase price of $1,100,000 and a down payment of $300,000, you'd walk way with $1,354,000 in gains.

    Of course there's the loan, so I ran a 30 year mortgage on $1,100,000 at 2.75% -- at year 20 the loan balance would be $470,600. That would be an additional $629,400 for a total walk away of $1,983,400.

    If you invest $50,400 a year into the stock market, you'd have to average a 6.15% rate of return over that 20 year period to end with $1,940,000.

    This comes down to if you really want to live in an apartment compared to a house, and if you invested in the market, if you felt you could outperform an average return of 6.15%.

  • Login to rate this answer:   Answered on 3/7/2013
**All above answers are provided as general information only. No warranty is made regarding the fitness or accuracy of the information provided in this answer. You should seek advice from a licensed CPA, attorney or CERTIFIED FINANCIAL PLANNER™ as to your unique financial situation.