Buying a property to rent out can be a good financial investment, but has high up-front and on-going costs, and is relatively illiquid. Is it worth it?
Customise the inputs to run your own scenarios comparing buying and renting.
We model the wealth accumulated at different points in time through buying a house and renting it out. The chart compares this scenario to the simple baseline of investing the property's initial costs into the stock market, receiving 6% annual returns. Here's how the scenario was modeled. Example figures are given in square brackets.
You then take out a loan with a particular Loan Term [30 years], for the property price less the down-payment [$480,000]. The Interest Rate [3–5%] of your loan fluctuates slightly each year, and each month, you pay off part of the loan, and pay interest on the remaining unpaid part.
Each month you also receive rent payments from your tenant(s). We assume that these cover at least the cost of your monthly mortgage payment, but they'd ideally be a little more [$2,000].
Each year, you pay Annual Costs [1.5-2.5%] for property maintenance, and each year, the value of your property increases according to the rate of Annual Appreciation [3–6%]. Each year, you raise the monthly rent in line with Annual Appreciation.
Each year, the wealth you've accumulated is equal to the current value of the property, minus the loan amount outstanding, plus the total rent you've collected.
In practice, there will be costs involved with selling the property that our model doesn't account for. Property is also relatively illiquid — there's no guarantee that you'll be able to sell the property at your desired price and on your desired timeline.
When analysing a real-world scenario, there is always a trade-off between model complexity and accuracy. For simplicity, we've ommitted some real-world factors, like tax incentives and deductions here.
It's hard to say exactly what Annual Appreciation will be over the next 10, 20, 30 years. But we can reasonably say that they'll probably be 0–4%, and that there's a small chance they may even be significantly lower or higher. Representing variables as probability distributions lets us do this.
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