Rent vs Buy Decision

Introduction

• Presenter: Ben Felix, Portfolio Manager at PWL Capital
• Focus: A new way to assess the rent versus buy decision for housing using the 5% rule.

Traditional Misconception

• Common belief: Buying is good if mortgage = rent.
• Flaw: Mortgage payment isn't directly comparable to rent.

Proper Comparison

• Compare total unrecoverable costs of renting and owning.
  • Renting: Unrecoverable cost is the rent paid.
  • Owning: Unrecoverable costs include property taxes, maintenance costs, and cost of capital.

The 5% Rule

• Property Taxes: ~1% of home value annually.
• Maintenance Costs: ~1% of home value annually for various repairs and renovations.
• Cost of Capital:
  • Debt: Interest on mortgage (~3%).
  • Equity: Opportunity cost of not investing down payment in stocks.

Cost of Equity Capital

• Home is an investment in real estate as opposed to stocks.
• Historical Returns:
  • Real Estate: ~1.3% (real return)
  • Stocks: ~5.2% (real return)
• Nominal Returns:
  • Real estate: ~3%
  • Stocks: ~6.9%
• PWL Capital's Expected Return: 6.57% for a 100% equity portfolio.

Application of the 5% Rule

• Unrecoverable costs of owning: 5% of home value.
• Decision-making:
  • Calculate potential unrecoverable costs for buying.
  • Compare to rental costs.
  • Example: $500,000 home = $25,000 annual unrecoverable costs.

Adjustments to the 5% Rule

• Tax rates and portfolio mix affect the rule.
• Tax Considerations:
  • Pretax vs. after-tax returns.
  • Adjusted cost of equity capital for taxable accounts.
• Portfolio Mix:
  • Conservative investors may use a 4% rule.
  • Aggressive investors benefit from the 5% rule.

Conclusion

• Opportunity cost is a crucial factor in homebuying decisions.
• Adjust the 5% rule based on personal finance situation.
• Interactive Element: Encourage audience to share their perspectives.
• Additional Resources: "Rational Reminder" podcast for more insights.

Closing Remarks

• Reinforcement of the 5% rule as a tool for financial decision-making in housing.
• Encourage sharing the video and audience interaction for broader perspectives.