Bulls, Bitcoin & Beyond

Hello Folks,

Happy Monday!!

In today’s special edition, we provide a simple calculation to help you decide whether to own a house or rent an apartment.

Let’s go 🚀.

Should You Own a House or Stay on Rent?

A penthouse in London, a beach house in Malibu, or a log cabin in Europe: everyone’s got a dream home. But figuring out how to turn the dream into reality is quite challenging.

We all need a roof over our heads, and choosing whether to buy or rent a house can confound even the brightest minds.

Here, I provide a simple calculation to help you decide whether to buy a home or delay the inevitable purchase by a few years.

First, we calculate the cost of home ownership, which includes:

👉 Interest and principal payments

👉 Maintenance and

👉 Taxes

Let’s assume you want to buy a house worth $450,000, higher than the average home price in the U.S., which is $412,300.

Given the average property tax in the U.S. is 1.1%, you will pay an annual property tax of $4,950. You may also have to allocate 1% toward yearly maintenance costs, which amounts to $4,500.

Cost of capital

Next, we calculate the cost of capital, which includes a $90,000 (20% of the home price) downpayment and a 30-year mortgage worth $360,000.

In the last 20 years, the S&P 500 index has returned 10.6% annually, on average, after adjusting for inflation. Comparatively, home prices have increased by 3.6% each year.

So, the difference in outperformance is about 7%. It indicates the $90,000 downpayment allocated to purchase a house could earn an additional 7% if invested in the stock market. So, the annual outperformance difference is $6,300 ($90,000×7%).

Now, we calculate the debt cost, including your $360,000 loan at 7% interest. It means your annual interest expenses will be $25,200 ($360,000×7%).

The total cost of debt, including the outperformance difference, is $6,300 + $25,200 = $31,500. It accounts for 7% of the entire home amount of $450,000.

The last step is to add capital and home ownership costs, such as maintenance and taxes.

The total cost increases to $40,950 ($31,500 + $4,500 + $4,950), 9.1% of $450,000.

It suggests the cost of home ownership each year is $360,000 × 9.1% = $32,760, while the cost of owning a home each month is $2,730 ($32,760/12).

What does this mean?

If your current rent is below $2,730, you should continue to rent the property. But if the monthly rental is over $2,730, it might make more sense to start looking out for your own home.

Cons of this model

This model is quite simple and easy to understand. However, the calculations involve a few cons and assumptions.

• For instance, generally, all mortgage loans have an amortization schedule. This means that initial mortgage payments will have a higher interest component, which will be reduced with each additional payment.

• There are tax benefits associated with owning a home. You may deduct up to $14,000 each year in mortgage payments.

• While mortgage payments may be fixed for a few years, rent prices change yearly.

• The fulfillment of owning a home cant be calculated

The pros of renting

• It offers you flexibility

• There are no annual costs such as taxes or maintenance

• You may get access to facilities such as gyms and pools in specific apartments

The bottom line

You need to consider a few things: the varying costs of renting vs. buying, the advantages of being able to move, the changing needs of a future you, and whether you want the security—but also the responsibility—of having a place of your own.

If you’re based somewhere you plan to live long-term, have savings piling up, and like the idea of a place of your own – you should be looking to buy. But if you value flexibility – you should probably rent for now instead.

For many people, the correct answer is a combination of the two: renting when you’re younger and buying when you’re older.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell assets or make financial decisions. Please be careful and do your own research