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Author: GusSmed Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 61157  
Subject: Re: Here's A Good Question Date: 2/2/2007 3:02 PM
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You need to look at that again. Purchasing the condo only saves me $2400/year at the cost of forgoing $3,000/year interest on the CD. That leaves me $600/year in the hole.

That's not really the right comparison. I don't know how to restate this in a way that makes it any clearer than what I already said. Based on your own research, you can't just use current CD interest rates to determine sustainable return on a sum of money, $60,000 in this case. You have to take into account variations in interest rates from year to year and inflation.

If you neglect both inflation and interest variations, I could argue that if my expenses are $50,000 a year, I can retire safely on a $1,000,000 CD at 5%, and we know that's not the case. Inflation is going to change my expenses, and CDs won't always return 5%. Sometimes more, sometimes less. Just a few years ago, CDs only returned 2%-3%, tops.

Also, for some reason Houston has a chronically overbuilt apartment market. My lease today is at the 1996 level after the landlord reduced my rent the last three years.

You're making assumptions about the housing market to predict the future. Maybe you're right, Houston's rents will never, ever rise above today's rates. But I wouldn't want to make that bet myself.

If they do rise over, say, the next 10 years, you have to subtract that inflation from the current CD rates. Whatever those may be over the same period.

I know this doesn't work everywhere, but it's good to be a renter in Houston.

I'm arguing that from a SWR standpoint, based on the figures you gave, it's neither good nor bad. It's equivalent, financially. In other markets, or in Houston at other times, that may not be the case.

- Gus
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