Well, you're forgetting taxes, for one. You can't directly compound a regular savings account, you have to take a haircut each year (unlike, of course, appreciation of a primary residence, which doesn't get taxed until the end, and currently enjoys preferential treatment: a $250k exclusion from capital gains every two years [Thanks, President Bill, I've tapped that twice so far] if you're single, $500k if you're married).
For the numbers I used the other day -- $100k W-2 income, no deductions, 5% savings account -- I showed (via TurboTax) a 57% effective marginal rate[*] on the interest earned for a $115k nugget ($5750 interest the first year); slicing that roughly in half is unlilkely to have a big change on the marginal rate (AGI goes from $91k to $89k). So $50k for 30 years at 5% gives you $112.9k (not, ahem, $3.8M), which of course doesn't beat inflation (yet house appreciation does; Doug's source says it beats it by 1%, I'm still formulating a response [I think it's low], but that's plenty good enough to beat a [taxable] savings account). This is a significant SWAG tho, because your income might go up or down, interest rates and tax policy might change. Blah, blah, blah. FWIW, if you can get home appreciation and your savings account to match, the compounding plus cap gains break is significant: you'd have $205k at the end of 30 years rather than $113k. They converge when home appreciation is 2.8%, which I'll note is lower than your presumption in the math that made you a millionaire :)
* This is an important point: when deciding between putting money that you have down on a house and getting a bigger loan, the only calculation that matters is to look at the post-tax cash flows. With mortgage interest rates at historical lows and savings rates a little below that, it's nearly a wash. Two examples (including property tax from my earlier examples):
$575k house, 20% down = $2,012/mo; 0% down = $2,052/mo $250k house, 20% down = $875/mo; 0% down = $892/mo
These both presume you _have_ the 20% to put down, so don't use the 0% number if you actually don't have a down payment (the numbers in that case are $2411 and $1049, still not strikingly different).
Anyway, now that you've shown that you put $50k "down" on your coop, we can get better numbers. A $200k 6.25% mortgage is $12,500 of interest/yr (I've been using interest-only numbers because the principal payment scam makes the math harder; feel free to take that out and put it back in later, but it doesn't change anything) or just over $875/mo post-tax (including property taxes). Recall that your average rent over 30 years is $977/mo.
Can we presume that since your shares have a right-of-first-refusal from the coop itself that your return will necessarily be lower than what other real estate will generate? Maybe real estate in Baltimore goes up, maybe it goes down. But given a $50k purchase of coop shares and a $50k down payment on a house ... all else being equal?
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> there are maintenance costs that are included in my carrying
> charges, but they are extra for individual homeowners. Assuming
> those costs to be on average $5k per year ...
How could they be $5k/year if it's included in your $568/mo (er, $6816/yr)? $5k is way too high, the NYTimes thing says 0.5% or $1,250 on your nominal $250k. Hey, I've got an idea: how about you find out from your coop what the actual breakdown of your carring charge goes for?
Anyway, maintenance is typically viewed as part of the reason houses appreciate: not at 100%, but something (a kitchen remodel, for instance, is usually 70%). If your house appreciates a lot, and you put a significant amount of maintenance in that's amortized, this can increase your basis and decrease your capital gains tax later (if applicable ... YMMV).
> I the renter, could invest that $5k at 4.5% interest rate, thus
> obtaining the payoff of nearly $3.8 mil ...
Ignoring the math mistake, do you actually put $5k into a savings account each year? If so, good for you! It'll be worth $237k in 30 years :)
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I think this is close enough to restate my original thesis: buying and renting are roughly competitive on a cash-flow basis -- and certainly not different by a factor of 3 or 4. I certainly agree that a coop like yours can be a good deal both financially and psychologically, but I think you've overstated the case financially.
Now can we please go back to discussing Henry Potter?
/jordan