This is a calculator for showing the returns on assets through 3 different home buying strategies. 1. Renting and not buying a home. 2. Buying a home with margin for the down payment. 3. Buying a home and selling equities for the down payment.
The calculator does not account for the capital gains paid on liquidation of equities to pay for the down payment. This is another drag on returns that must be accounted for.
The beginning values are baseline assumptions that make sense in the 2021 environment of interest rates. I recommend reading my post on this strategy to understand the potential pitfalls. It should be understood that the increased returns are due to the increased risk gained from the leverage utilized. Risk mitigation strategies should be considered before attempting this strategy.
What the Calculator Does
You can inspect this page to read the javascript yourself to check the math. The code computes 3 important 30 year returns: The return on renting, the return on buying a home with margin, and the return on buying a home without margin. To do this, it calculates the cost of each strategy. The cost of not buying the home is the cost of rent. The cost of buying the home is the cost of the mortgage. The cost of buying the home with margin includes the margin interest cost, where buying the home without margin reduces the stock portfolio by the down payment on year 0. The returns are nominal net values after subtracting the liabilities of debt at the current time.
The Landlord Value is calculated with the cost of rent added back onto the stock returns. Rent is assumed to be invested into the equity which receives the compounding returns of the "Stock Expected Return" value. This allows the calculator to function as a real estate investment tool, or just a personal home buying tool.
Inputs
House Value: The value of the home that will be bought
Home Expected Real Annual Return: The expected real annual return on the home. Historically has averaged 1% (0.01) nationally, but differs greatly by locale.
Downpayment as a Percentage: The down payment on the home. The imputed nominal margin is dependent on this value. Higher values mean more margin, which will increase borrowing risk.
Mortgage Interest Rate: The annual mortgage interest rate. This is the typical number used to compare mortgages on their price.
Loan Term in Years: How many years the mortgage is. 30 is typical.
Value of Stocks: How much the value of invested equity to be used for margin. For safe margin levels, the down payment nominal value should be less than 20% of the value of equity as margin.
Stock Expected Return: The expected real return (CAGR) of the stock market. Historically around 7% (0.07) for the S&P500. I would recommend not using margin on individual securities.
Cost of Rent: The alternative cost of renting instead of buying. This will reduce the "Renting Value" returns in the graph below. The reasoning is that buying a house gives you somewhere to live, so if a house isn't bought, then rent will be paid somewhere else. This should be captured to compare returns fairly.
Adjust rent by real home appreciation?: This will increase the price of rent by the expected real annual return of the home. This will give a better apples-to-apples comparison of renting over 30 years compared to buying over 30 years. The price of the mortgage does not inflate, whereas rent will.
Margin Interest Rate: The blended interest rate on the margin loan. The ratio of this value to the mortgage interest rate has the most effect on the efficiency of this strategy. If this is close to or above the mortgage interest rate, then this strategy may not be return-wise optimal.