Opportunity Cost: No Free Lunch
I read a great article about buying an apartment “for free” in NYC. It was well-written and thought-out, but missed a crucial financial factor that we all tend to forget about – opportunity cost.
Opportunity cost is the… sacrifice related to the second best choice available to someone
In other words, we give up the benefits we would have gained had we made a different choice.
This was my comment to the author…
Nice analysis! For me, renting is still preferable because of two other factors. 1. Liquidity – if real estate prices in the area go down (everything has a cycle and it’s happened before in a big way in NYC), and I’m renting, I just walk away, leaving the owner to worry about it. You’ve made a bet that prices will go up; which is fine, but not guaranteed. 2. Opportunity cost – the 3.5% increase you’re hoping for will probably not keep pace with inflation (even the gov’t fantasy number, no less real inflation). But worse (if you’re wrong), you will not be investing any of the money tied up in equity in other asset classes. Again, this is another bet on real estate; this time vs. stocks or precious metals or agriculture… So I’m not saying it’s a bad idea, just that nothing comes for free