The ol’ Financial Uproar machine was a little sparse last week, on account of me FINALLY GETTING A LIFE AND SOME FRIENDS GOD I HATE YOU ALL SO MUCH. Okay, that’s not so true. I was moving my things from my parents’ garage into a more permanent living situation.
Hell, I even embraced minimalism for a little while there, because really, I’m sick of my useful and nice things keeping me down. DAMN YOU TO HELL, THINGS.
— Nelson! (@financialuproar) May 31, 2015
Okay, by the looks of the chair I don’t exactly have nice things, but it’s a comfy place to rest my ass. And let me tell you, staring at that wall is fascinating. If I smoke enough weed, it’ll even change color.
After getting shut out in our attempt to buy a reasonable house for the low, low price of a quarter million freaking dollars, the old lady and I decided to change tactics. We figured we’d find a nice place to rent until the market went to hell, and then take another look at the real estate market then.
Pretty much the first landlord we talked to had just finished restoring an old building into a new four-plex, complete with hardwood floors, in-unit laundry, two huge bedrooms, and enough space that I could conceivably go days without seeing Vanessa. Hell, she might be dead. I have no way to know.
For $1,550 per month we rented the place, a number that includes power, heat, water, garbage collection, and really fast internet. All we’re responsible for is cable — and we’re holding off on that because the landlord may get everyone together to agree on some sort of cable package for a small additional fee.
Let’s compare that to a house. Say I paid $250,000 for a place, putting 5% down. I’d be looking at a payment of about $1,150 per month, which easily trumps renting right? ALL HAIL THE MIGHTY HOUSE OWNER.
But the expenses don’t end there. I’d have to spend about $500 per month for utilities on a house, plus $200 for taxes, $100 for insurance, and at least $100 per month on upkeep. Building sex dungeons in the basement isn’t cheap. Yes, I meant that plural.
Suddenly, we’re at more than $2,000 per month just to buy a pretty equivalent house. Yes, my rent is likely to go up over the years, but I based the mortgage payment on a 3% mortgage, which is also going to go up each year. So we’ll call it a wash.
But we’re forgetting something. I still have $12,500 to invest. And I’ll likely have $500 extra per month to invest for the conceivable future too.
I’m too lazy to show my work, but you can double check if you’d like. At a 7% return, my investment will get me about $470,000 over the 25 years I’d be paying the mortgage. And unlike a house, I can count on that $470,000 to continue creeping up by 7% per year for another 10 years until I reach retirement age.
But let’s take it a step further. Say I had $200,000 I set aside for a house. Just how much would it be worth after 25 years?
Let’s run the base numbers first, assuming I put it into a house. I’m going to assume a 2% return over the next 25 years, which I think is reasonable after Canadian real estate’s big run.
So yeah, that’s not a very good return. Seems like a pretty poor spot for imaginary Nelson’s cash.
How about if he was able to invest it, earning the same 7% as he did in the earlier example?
Now we’re talking! Even 25 years from now, a million bucks isn’t going to be anything to scoff at. Sure, taxes will partially effect this return, but paying taxes on that kind of cash is pretty much the very definition of first world problems.
But what if we took this a step further? Remember, renting Nelson is saving $500 per month compared to owning Nelson. Let’s say he can invest his $200,000, plus add another $6,000 per year to the kitty. How much will he end up with then?
By renting, I’ve all guaranteed imaginary Nelson will end up a millionaire. All he needs to do is stick that $200,000 in some index funds, have a 25-year nap, and he’ll end up rich enough to have all the seniors’ center ladies hitting on him. ONE AT A TIME LADIES, GOD.
I don’t intend to rent forever. I’m certain at some point the numbers will turn back in favor of buying, and when that happens, I’ll probably be there with some cash. But until then, I’m happy to throw my money away renting. And in most other Canadian cities, you should be too.