Hi Brett.

Leverage is the only thing that makes owning a house (that you don’t rent) make financial sense.

But, a few things about your analysis.

  1. We can’t assume a 10% return per year for Real Estate. It can happen in certain years in certain markets, but the long term historical average is around 3% so we need to use that in our financial projections when considering buy/rent.
  2. You also aren’t factoring in the 1% annual property tax and 1% annual maintenance cost which on a $500,000 house would be $10,000. $10,000 needs to be taken off the return of the gains on the house.
  3. The opportunity cost of not having invested that $100,000 in Stocks, where we can assume a 6% rate of return. The opportunity cost needs to also be taken off your projected return of the investment in the house. Remember this analysis is assuming that if you rent, you invest 100% of the new capital into stocks.

If you take all those factors into account and the math still looks like it favors buying, then you have your answer.

Thanks for the great comment!

Ben

Economic policy wonk by day. Personal finance writer by night. I write about investing, debt, and all things related to money. Editor of Making of a Millionaire

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