Saturday, 25 June 2011

buy not rent, generate £295000 capital

I have been looking at the sums involved in the equation of rent or buy for the homemaker.

I have been fortunate enough to have lived through the property price boom and seen a £90000 property increase in value to a whopping £450000 in 25 years. by the way, this is not a personal example, just a hypothetical, nominal value. It is actually a good starting point if you were a first time buyer in 2011.

Assuming that you had purchased the property via a mortgage, then it would have cost £90k x 3% interest on the mortgage, i.e.£154,500 over the term of 25 years.

Thus the capital in the property would be £295k at the end of the 25 year period, with the assumption above. Critically, inflation would devalue the capital but it would still be your money.

If, on the other hand I had taken a rental property, then the rental cost would have been £194264 assuming a rent of £500 per month with a 2% annual increase in rental prices, with no capital at the end of it.

So, to buy, even in a depressed market as per 2011, makes sense. If we use the model above, then the £154,500 in mortgage costs could be considered as rental payments, the debt is gone and the capital is yours.

Looking at the worst case scenario, of house prices only went up by 1% each year, then in 25 years the property would be worth £188440 with an investment return of £98440.

I have to find a model that will allow me to purchase property and then rent without having masses of capital.

Anyhow, I have shown that it is possible to generate £295k capital, but it takes a while.....

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