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Disclaimer - while the calculator is a comprehensive tool, it is to be used only as a guide; the results do not constitute a recommendation by the Shape of Money as to the success or failure of deciding to purchase a property.
You are strongly recommend to take some time to review and understand the following information.
Please read the information contained in The Basic Valuation Model. The option that has the highest NPV value represents the best option.
The simple concept is to compare the same level of outgoing funds whether you are a renter or a buyer. For example, if the annual costs of renting are $20,000 and the annual costs of buying (including mortgage repayments and rates etc) are $26,000, then the calculator will assume that the renter invests the difference of $6,000.
It is recommended that you carry out some sensitivity analysis. Use a base set of best guess values or variables, then change the key variables (such as rent, capital growth and inflation rates) to judge the effect of changes to these conditions.
A table repayment loan type is used.
Investment rate - The excess funds are reinvested annually at the post-tax investment rate.
Inflation rate - We have entered a default value for inflation, but you can over write this with your own estimate. This value is used to grow several variables on an annual basis, including weekly rent, rates, maintenance, insurance and other expenses.
Real capital growth rate - This rate is used to grow (or decrease) the value of land and building costs. If your rate is 1%, please enter 1.0. This is independent of the inflation rate. ("And when you strip out inflation, the rise over the 40 years is just over one percent per year" - page 72, More Money, Less Debt, Consumer Books).
Weekly rental - This is how much rent per week you expect to pay. This variable is increased each year by the inflation rate above.
Rates, Maintenance, Insurance and Other House Expenses - Please enter the estimated annual numbers. These variables are increased each year by the inflation rate above.
Agent's commission - We have entered a default value for the agent's commission, but you can over write these with your own estimates.
Investment Term - Over how many years do you want to compare the two options? Please choose a period of up to 15 years.
Discount rate - This rate is used to calculate the net present value of the cash flows. Please read the information contained in The Basic Valuation Model. The option that has the highest NPV value represents the best option.