Of Buying and Renting
As everyone knows, renting is throwing rent money out the window. Buying is a better use of your money: it's like, the money goes in your pocket instead of your landlord's pocket.
It's not that simple
As the argument keeps coming up when I mention I don't want to buy at the moment, and unfortunately explaining why buying doesn't always make financial sense takes some time, I'll explain it here for future reference.
I'll take real-world example: we live in Toulouse, France, and have recently looked at buying or renting. I'll compare figures with investing into Société Générale's 'Sequoia' funds, as I have one of those and therefore all the figures at hand. This applies to December 2005: I am not saying renting is always better than buying, I am saying that this is the case now
We'll examine two cases: the case where we already have the money to buy the place straight away, and the case where we'll take a mortgage to buy it.
So, what shall we buy?
Here is a flat in the centre of Toulouse. In case the link goes away if it sells, it's a 2-bedroom flat, fairly central, sold for 132,000EUR. It's currently rented for 5,730EUR per year, so that's 477EUR per month. The flat is sold as an investment, already occupied, so it's ideal for us: we know both the selling price and the rent price.
I have cash: I buy today
Congratulation, you are now a Landlord. So, you've invested 132,000EUR, and are now getting 5,730EUR a year in rent. That's 5730/132000 = 4.3% return on investment (ROI).
If you didn't buy, you could have placed your money on Sequoia Security: that's a garanteed 4.1%. If you were a little more adventurous, you would place your money in Sequoia Defence: it's done +55.82% since 1995 (so that's taking in account the stock market crash of 2001) which is an average of 5.5% per year. It's done +6.7% this past year. It's a fairly risk-free investment. Your capital would be paying you 7,260EUR/year, 605EUR/month, so you'd have 128EUR left after paying your monthly rent.
Conclusion: buying costs you 128EUR per month more than renting, and housing makes a poor investment of yor savings.
I take a mortgage
Taking a mortgage makes things more complicated. We'll suppose we found a bank that'll lend us over 30 ears for 3.55% (as suggested here).
Using this simulator, we find we'll need to pay 660EUR/month over 25 years to buy this 132,000EUR flat. Incidentally, that's 66,000EUR of interests (cynics could say that's money thrown out of the window).
The ROI remains negative (your investment costs you money) for 25 years: don't expect any returns before then.
If, instead of buying, you put aside the difference (660-477=183EUR/month) you end up with a capital of 54900EUR after 25 years.
It's actually worse
Here, I've compared a fairly risk-free investment to renting. This is overlooking something important: renting is a fairly high-risk investment. You must find a tenant, you must deal with potential degradation, you must spend time dealing with it, you must pay tax on the property, and if you need your capital back (to buy a house) you need to sell, pay tax on the sell, etc. The 4.3% ROI is actually over-evaluated.
In comparison, the returns of the bank investment comes regularly, and your capital is available within a day should you need it.