Question for the Money Doctors

Question submitted on Aug 4, 2022.

Question

On the rent vs.buy model, the investment represents the alternative that you could have earned if you had put your down payment into the market if I'm reading this correctly. Why does it lose value over time and post large negative numbers?

Answer

There are many variables to consider when deciding whether to rent or buy a home.

One consideration is how to invest the down payment while you are still renting.

You should not put the down payment into risky investments.   For example, a client was playing the stock market with their down payment money.   At first, it was great, he kept making money - even doubling his money.  However, this is too risky because he lost it all and they no longer had a down payment to purchase a home.

Tip - never gamble your down payment.

Accordingly, the down payment will be invested in very safe investments such as money market funds, CDs, or savings accounts.  At least nominally, you will not lose value and there is no risk.

However, you can "lose" value over time due to inflation.

Good luck!

We can talk some more about the other variables to consider in the rent vs. buy decision.

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