I have often heard the following claim from young couples and their parents: When you rent an apartment, you end up with nothing left of the money, whereas when you purchase an apartment with a mortgage, you end up owning an apartment. This is, of course, a completely false claim. In this chapter, we will explain why. But at this stage, we will go ahead and say that the decision whether to purchase or rent an apartment is influenced by both financial and personal considerations. The main focus of the chapter will be on understanding and analyzing the financial considerations. After that, we will briefly review the set of personal considerations that should not be ignored.
Economic viability
For the purpose of explanation, we will use the following story: Two friends Avraham and Binyamin, who are currently living with their parents, are interested in moving into their own apartment. Avraham is interested in purchasing an apartment and Binyamin is interested in renting. At the same time, 2 identical apartments are being offered at 20 Bialik St., second floor.
One is for sale for $150,000 and the other is for rent for $500 per month.
The two friends work for the same computer company. Each of them earns $2,500 net per month ($30k per year) and has already accumulated $100,000 in savings (part of it from an inheritance). The savings are invested in a savings plan that yields 5% interest per year. This savings is called: The savings The original . We will examine below which of the friends will be richer in 12 years, in each of the 3 scenarios that we will present. In each of the scenarios, Abraham takes out a mortgage for a period of 12 years at an interest rate of 5%, repaid in 12 equal payments at the end of each year. The scenarios differ from each other mainly in the amount of the mortgage that Abraham takes out:
In scenario 1- Abraham takes out a mortgage in the amount of – K $150 and all of his original savings remain in the bank. In scenario 2 – Abraham takes out a mortgage for $100k and adds $50k from his original savings. In scenario 3- Abraham takes out a mortgage in the amount of $50K and supplements it with $100K from his original savings.
