The Very Different Outcomes of Buying and Renting After 30 Years, Second Edition

Those who do not buy a home invest in a Nasdaq-100 index fund and have $26,081,195 by retirement. Because all of this money is in liquid assets, they can pledge the assets as collateral, borrow to buy a home, or continue renting. They have great flexibility, their assets keep growing, and life gets better and better.

Homebuyers may become so poor that they have no cash flow for food!

Example:

I. Homebuyer:

Buy a $3 million home in Cupertino, United States, to live in, with a $600,000 down payment and a $2.4 million mortgage at 6.5% interest. The 30-year mortgage payment is $15,170 per month. Property tax is $40,500 in the first year, based on a 1.35% property-tax rate, and rises 1% each year.

The assets after 30 years are calculated as follows:

Homebuyer's Assets After 30 Years:

1. The home appreciates 7% per year. After 30 years, it is worth 7.61 times as much, giving the home a value of $22,836,765.

2. Property tax provides a $10,000 tax deduction. At a 32% marginal tax rate, this saves $3,200 per year. Invested at 10%, it grows to $526,180 after 30 years.

3. Mortgage interest provides a $10,000 tax deduction each year. At a 32% marginal tax rate, this saves $3,200 per year. Invested at 10%, it grows to $526,380 after 30 years.

Homebuyer's Total Net Worth After 30 Years:

The home is worth $22,836,765, plus $526,380 accumulated after investing the annual property-tax savings for 30 years, plus $526,380 accumulated after investing the annual mortgage-interest tax savings. Total assets are $23,885,526.

II. The renter has the $600,000 down payment and invests it in QQQ at a 10% annual return. Rent is $9,000 per month and rises 3% each year. The renter also has the cash flow saved relative to the buyer's $15,170 monthly mortgage payment, plus $40,500 per year in property-tax cash flow, increasing 1% annually.

Renter's Assets After 30 Years

1. The initial $600,000, earning a 10% annual return, becomes $10,469,641 after 30 years.

2. Investing the $15,170 monthly cash flow saved relative to the homebuyer at a 10% return produces $31,542,870 after 30 years.

3. The renter's annual $40,500 of property-tax cash flow, increasing 1% each year and invested at a 10% return, becomes $7,245,699 after 30 years. The calculation is shown in the attached image.

Renter's Rent Expense:

1. Monthly rent is $9,000, or $108,000 per year. With rent rising 3% annually and a 10% investment opportunity cost, total rent paid after 30 years is $23,177,015. The calculation is shown in the attached image.

Renter's Net Worth After 30 Years:

Assets:

The initial $600,000 investment grows to $10,469,641, the invested mortgage-payment savings grow to $31,542,087, and the invested property-tax savings grow to $7,245,699, as shown in the attached image. Total assets are $49,258,221.

Renter's Housing-Rent Expense:

With monthly rent of $9,000 rising 3% each year and a 10% investment opportunity cost, total liabilities from rent after 30 years are $23,177,015.

The renter's total assets after 30 years, $49,258,210.88, minus the renter's housing-rent expense of $23,177,015, equals $26,081,195.19.

Conclusion:

Homebuyer's net worth after 30 years: $23,885,526

Renter's net worth after 30 years: $26,081,195.19

After 30 years, the renter's total net worth is $2,191,668.45 greater than the homebuyer's.

But if both retire after 30 years with no other assets or income, their circumstances and outcomes are very different:

The homebuyer is left with a $22,836,765 home and $1,052,761 in liquid assets. There is only a little over $1 million in cash flow, while property tax of $54,047 is still due in year 30, as shown in the attached image, and keeps rising each year. A little over $1 million cannot cover property tax of more than $50,000 plus living expenses in a U.S. retirement.

The person who does not buy a home invests the cash flow in a U.S. Nasdaq-100 index fund and ultimately has $26,081,195 in liquid net assets after 30 years. These assets can be pledged as collateral to borrow for a home or to rent, without diminishing the liquid assets, while still providing cash flow for living expenses.

Everyone should therefore understand that homebuyers cannot put all their assets and cash flow into buying a home. Before buying, they should have assets equal to twice the down payment and monthly remaining cash flow equal to twice the monthly mortgage payment before considering a home for their own use, if it is truly necessary. Otherwise, in old age they will be left poor with only one house, unable to live, while still paying high property tax every year.

Those who do not buy a home invest in a Nasdaq-100 index fund and have $26,081,195 by retirement. Because all of this money is in liquid assets, they can pledge the assets as collateral, borrow to buy a home, or continue renting. They have great flexibility, their assets keep growing, and life gets better and better.

That is the very different outcome for those who buy property and those who rent.