Buy or Rent? - Real Life Example
Here's what I think is a fairly good and practical example for why to buy or rent a place.
A 5 family (4 one bedroom, 1 three bedroom) building is for sale.
It currently can rent all 1 bedrooms for $800 and the 3 bedroom for $1300.
Since this would require a business loan, it would require 20% down and 8% interest on the remainder.
Yearly expenses (taxes, upkeep, utilities, insurance) comes to $20k per year.
At what price would you consider buying this?
Say it's $500k, that means $100k down + say $15k closing, then $32k in interest per year.
Fully rented it generates $54k per year (or $34k after expenses).
Would you buy this or rent at $800 and use the $115k to invest in something else? Let's assume the inspections check out and it's in a decent place in town.
A 5 family (4 one bedroom, 1 three bedroom) building is for sale.
It currently can rent all 1 bedrooms for $800 and the 3 bedroom for $1300.
Since this would require a business loan, it would require 20% down and 8% interest on the remainder.
Yearly expenses (taxes, upkeep, utilities, insurance) comes to $20k per year.
At what price would you consider buying this?
Say it's $500k, that means $100k down + say $15k closing, then $32k in interest per year.
Fully rented it generates $54k per year (or $34k after expenses).
Would you buy this or rent at $800 and use the $115k to invest in something else? Let's assume the inspections check out and it's in a decent place in town.
posted by DD at 1:47 PM
6 Comments:
There's somewhere in the country where a 5 family apartment building sells for $500K and a 3 bedroom apartment rents for $1300? I think these numbers are way off and radically alters the equation.
Buy, live in one unit, hire a partime maintenance person.
Phil...amazingly enough, we are talking about the northeast here, hour and a half north of the city to be more precise.
Gigi...agree, I personally would hate the late night "my toilet is broken" calls.
MM...just out of curiousity, how come you take into account taxes in the investment scenario, but not in the house scenario? I was also wondering what the $1220/year in out-of-pocket expenses was?
The other problem with this all is coming up with $100,000 to put down. Not a very easy task.
MM forgot to mention one thing in the calculations, and that's risk.
Investing 115K @ 8% for 30 years is a low-risk investment. It's slightly below historical stock market returns and it's over a long time. Owning a diversified portfolio of index funds takes no effort. Owning an income-generating property is like having a job, unless you pay someone else to run it, which cuts into profits. Owning a single property has much larger amount of risk than owning mutual funds, so it's apples to kumquats.
In general, I think the amount of risk associated with owning an apt. complex vs. index investing does not match the possible reward.
The other thing about a business loan is the maturity is much sooner than home mortgage. Looking at a 10 year maturity where the rate is renegotiated. Expenses did include property and school taxes at the time. A $1500-$2000 annual maintenance/upkeep cost was assessed. That could possibly be a little low.
MM,
"In a controlled experiment (such as this discussion), risk is minimal for either scenario. Real world is, obviously, a different story."
With regards to your statement, this is real world. This isn't just a hypothetical question...this is truly being considered. Not sure if that would change any of your conclusions, but just wanted to let you know.
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