You currently pay $10,000 per year in rent to a landlord for a $100,000 house, w

Question

You currently pay $10,000 per year in rent to a landlord for a $100,000 house, which you are considering purchasing. You can qualify for a loan of $80,000 at 9% if you put $20,000 down on the house. To raise money for the down payment, you would have to liquidate stock earning you a 15% return. We neglect other concerns, like closing costs, capital gains, and tax consequences of owning.

Given the described situation, determine whether it is better to rent or own. Show all your calculations and logical arguments.

Explanation / Answer

Its better to own a house as per below explanation :

Rent paid is $ 10000 per year

Down payment needed for $100000 house is 20000 onto which 15% return is coming means

15% of 20000 = $300

Definately you are loosing $9700 every year on rent that could be saved and another calculation is 9% of $80000

which comes upto $7200 per year so you would get profit of $1500 as per below

$ 10000 - 7200 (Loan intersest) = $2800 per annum

So go and buy your house as you can still save $2800 every year and own asset too.

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