Make sure your number stacks up

I found this article online about the pros and cons of renting vs buying.

"Assumptions:

> You are a first home buyer, 25 years old and based on life expectancy tables, you should live until 75

> I have used a $300,000 unit in my example

Renting

> An investor expects a 5 per cent return from a $300,000 unit

> Rent on a $300,000 unit @ 5% = $15,000 pa or $288 per week

> Rent increases on average at about 7 per cent a year, which means it doubles every 10 years

Buying

> A first home buyer requires at least a 5% deposit = $15,000

> First home buyer borrows $285,000 @ 6.5%, interest only for 30 years = $21,617 or $416 per week

> Home ownership expenses, such as rates, taxes, insurance, repairs, etc, average approximately 20% of the equivalent rental income = $58 per week

> I have calculated capital growth of about 7% per annum, which means it doubles in value every 10 years

This simple example above shows that you that it costs $9,600 pa or $186 per week extra in the first year if you buy the unit rather then rent it. This assumes that you have a $15,000 deposit and the FHOG & FHOB pay for all other buying costs. Now let’s look at the long term picture.

In summary, if you are now 25 years of age, by the time you are 75, you would have paid a total of $5,655,000 in rent over 50 years and your net worth is $0, if you didn’t buy any other assets.

However, if you bought the unit, you would pay $649,000 in mortgage repayments over 30 years and $1,131,000 in home ownership expenses over 50 years, totalling $1,780,000, making a difference of $3,875,000 in cash payments.

So there you have it - $13,475,000 difference. The home owner has $9,600,000 million in equity plus $3,875,000 better off than the renter because they made the decision to buy the unit rather than rent it."

Basically, your $300,000 home will become $9,600,000 in 50 years time at an annual compounding rate of 7%.

No wonder every America has rushed into residential property for a seemingly risk-free investment. Why wouldn't you when you are presented with figure like the above.

Invest wisely.