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Originally Posted by Te Whetu
1) Current Net Worth : $23,000
2) Savings per week : $150 (half of $300)
3) Annual after tax return on investments 5%
4) In this case his net worth in three years would be $51,800
First scenario I'll run is purchase with no growth in house prices over three years.
1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000
6) In this case his net worth in three years would be $30,000
Now I would argue that this is a highly likely scenario in the current environment. But to be fair and reasonable I’ll also show what will happen with -2%/3% price change in property per year.
Second scenario is purchase house with 3% p.a. growth in house prices over three years.
1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000, and the property will be worth $224,000
6) In this case his net worth in three years would be $49,000
Third scenario is purchase house with 2% p.a. loss in house prices over three years, (reasonable chance as you will likely be buying a pour quality place which generally performs badly until the market starts to peek.
1) Purchase a $205,000 property + $2,000 in fees etc.
2) Current Net Worth $21,000
3) Mortgage of $186,000 with payments of $300 per week (includes savings from not paying rent)
4) 7% mortgage rate
5) In three years the loan balance will be $175,000, and the property will be worth $193,100
6) In this case his net worth in three years would be $18,000... i.e. you’ve paid a mortgage and gone backwards.
Cheers
Te Whetu
TW – great post. Exactly what I had in my head, but couldn’t be bothered posting it. However, a future cash flow/NPV expert like yourself could have rammed this (rent v buy) home even more
The $20k gain from investing at 5%, with 7.8k (300 a fortnight) reinvested each year will compound to $50k after 3 years, to $70k after 5 years and around $145k after 10 years. You could say you can compound the remaining savings after mortage over those years to a bigger number as well, however houses generally require reinvestment every now and then. This is a $$/time/Stress burden which could be avoided.
At the age of 22 your wages should grow by more than inflation in 10 years, with your wages your ability/skills will rise allowing you to average a higher return than 5% + adding in the lady mean your savings rate/income will rise substantially. When you factor this in, that 145k will double!
Couple this with the non financial un-certainty’s a 22 year old will have – big holidays (would be rent free), relationships, unforecasted events, job losses? Even what you want from a property/town even life in 5-10 years time..
The list goes on – but for me, there is no buying beats renting for a youngster in your position – The numbers speak for them selves, but even bigger than this is the potential effect of the unknowns.
Don’t mean to pi*ss on the camp fire, but think its important you step back and think about this kind of thing in depth.
Last edited by buns; 03-06-2011 at 05:19 PM.
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