November 27, 2023 Recalculation: The Very Different Fates of Buying and Renting After Thirty Years, Second Edition

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November 27, 2023: Recalculating the Very Different Thirty-Year Outcomes of Buying Versus Renting, Second Edition

Example:

1. Home buyer:

Buy a US$3,000,000 home in Cupertino for self-use. Down payment is US$600,000, mortgage is US$2,400,000, interest rate is 6.5%, thirty-year monthly mortgage payment is US$15,170, first-year property tax is US$40,500 at a 1.35% property tax rate, and property tax increases 1% per year.

After thirty years, assets are calculated as follows:

Home buyer's assets after thirty years:

1. The home appreciates 7% per year. After thirty years it grows 7.61 times, so the home value is US$22,836,765.

2. Property tax deduction: the deductible amount is US$10,000. At a 32% marginal tax rate, it saves US$3,200 per year. Invested at 10%, this becomes US$526,380.87 after thirty years.

3. Mortgage interest tax savings: the deductible amount is US$10,000 per year. At a 32% marginal tax rate, it saves US$3,200 per year. Invested at 10%, this becomes US$526,380.87 after thirty years.

Home buyer's total net assets after thirty years:

Home value US$22,836,765, plus invested property tax savings of US$526,380.87, plus invested mortgage-interest tax savings of US$526,380.87.

Total assets: US$23,889,526.74.

2. Renter: the renter invests the US$600,000 down payment in QQQ at a 10% annualized return. Monthly rent is US$9,000, increasing 3% per year.

The renter invests the cash flow saved compared with buying: the US$15,170 monthly mortgage payment plus annual property tax cash flow of US$40,500, increasing 1% per year.

Renter's assets after thirty years:

1. Initial capital of US$600,000 invested at 10% annualized return becomes US$10,469,641.36 after thirty years.

2. Cash flow saved from the mortgage payment, US$15,170 per month, invested at 10%, becomes US$31,542,870.51 after thirty years.

3. Cash flow saved from property tax, US$40,500 per year increasing 1%, invested at 10%, becomes US$7,245,699.01 after thirty years. See the attached figure for calculation.

Renter's rent expense:

Rent is US$9,000 per month, or US$108,000 per year, increasing 3% annually. With 10% investment opportunity cost, total rent paid after thirty years is US$23,177,015.69. See the attached figure.

Renter's net assets after thirty years:

Assets: initial investment assets of US$10,469,641.36, plus invested mortgage-payment cash flow of US$31,542,870.51, plus invested property-tax cash flow of US$7,245,699.01. Total assets are US$49,258,210.88.

Subtract rent expense of US$23,177,015.69.

Renter's net assets after thirty years: US$26,081,195.19.

Conclusion:

Home buyer's net assets after thirty years: US$23,889,526.74. Renter's net assets after thirty years: US$26,081,195.19.

After thirty years, the renter has US$2,191,668.45 more net assets than the buyer.

But If Both Retire After Thirty Years With No Other Assets or Income, Their Situations Are Very Different

The home buyer is poor except for a US$22,836,765 house and only US$1,052,761.74 in liquid assets. With just over US$1 million in liquid cash flow, and third-year property tax of US$54,047.41 to pay, increasing every year, paying more than US$50,000 in property tax plus living expenses is not enough to retire in the United States.

The person who did not buy and instead invested the cash flow in the US Nasdaq 100 index fund ends with liquid net assets of US$26,081,195.19 after thirty years. They can use pledged borrowing to buy a home or continue renting. Liquid assets are not depleted and can provide cash flow.

Everyone should understand: buyers cannot put all assets and all cash flow into a house. Before buying a home, you should have assets equal to twice the down payment, and monthly surplus cash flow equal to twice the mortgage payment, before considering buying for self-use if truly necessary. Otherwise, in old age you may be poor with only a house left, unable to live, while still paying high property tax every year.

People who do not buy and instead invest in the Nasdaq 100 index fund can reach US$26,081,195.19 by retirement. Because these are liquid assets, they can be pledged, borrowed against, used to buy a home, or used to continue renting. They offer great flexibility, keep growing, and can support a better life.

This Is the Different Fate of Buyers and Renters