More Thoughts On Buying Vs. Renting Calculations

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There were some great comments on the NY Times buy vs. rent article, and many of them echo my own sentiments. Buying versus renting a house is a very individual decision. I do agree that the point of the article is that due to people’s differing time horizons and job instability these days, buying could be a great idea, but is definitely not an no-brainer. Renting is not “throwing money away” when you are faced with a mortgage payment that’s triple the rent and a 6% commission upon selling in a few years.

As the calculator suggests, the financial reality depends heavily on the rent/buy ratios in your neighborhood and how long you intend to stay.

When doing these rent inputs, you should really compare apples to apples. If you’re comparing the rent on a 2-bedroom apartment and the mortgage on a 4-bedroom detached house, which is really where you want to be living? You can always buy a 2-bedroom condo or rent a 4-bedroom house.

Who cares if the “average” homeowner stays in their house for 5 years? It’s you that matters. Some people are in volatile fields, or are young and want to live in hip urban areas for a short while, or just expect to move soon. This might tilt you towards renting. Others, like me, are moving to a specific city explicitly to live near family. We plan to stay indefinitely, possibly in the same house forever. Our brothers and sisters have lived in their first houses for the last several years.

Another big factor is what you expect your future annual home price appreciation to be. Historically, it’s been about 5-6%. But since we’ve been seeing 10-20+% for the last few years, it would seem likely that the next several years would be below that 5-6% average.

However, the last time I checked, the U.S. stock market has also been beating it’s 10% historical returns over the last few years. Does that mean we should assume lower returns the next few years? Some investors certainly think so, but the research shows that even professional money managers are horrible at such market timing.

In the end, I can try and make some predictions, but I don’t want to make a big bet on them being right. My opinion is that I just want the damage to be small if I’m wrong. For example, let’s look at an example graph from the calculator for a $500,000 house:

Buy Vs. Rent Calculator Results

Ignoring my specific inputs, let’s just focus on the fact that the break-even time shown is about 6 years. This 6 year number is the result of about 10 different guesses. Still, there is a period of +/- 2 years where the difference between renting and buying is not horrendous. A person’s feelings about such intangibles like a love or hate of doing home improvements could sway them in either direction.

As for us? The plan remains to buy a home towards the end of this year. I haven’t shared the neighborhood, so nobody can tell us if it’s a good or bad decision yet 😉

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  1. Calhoontuna says

    My opinion is that a house isn’t an investment; it’s a place to live.

    I hear it all the time, my friends telling me how much a financial genius they are because they bought a house and the thing has appreciated some much in the last few years. Everytime they fail to factor in property taxes, mortgage interest, and the twenty thousand dollar bathroom they remodeled. And that’s not even putting into consideration the lawnmower you have to buy and the gas you have to buy regularily to fill the thing up. You’re constantly forking out money for this so-called investment. And than something goes wrong. The fricken furnace goes out or you have to call some jerk in to fix the plumbing. I think if you run the numbers these huge gains dwindle real quick. A shell game.

    However with all that said, it is a lot nicer than having some loud mouth kid pounding over the ceiling with bricks tied to his feet. When I first moved in the quiet was so foreign it was disturbing.

  2. Calhoontuna, I’ll second that.

    It’s a place to live that you can make as nice as you want. I’m not putting in elegant crown moulding/trim in every room, adding a sunroom, getting professional landscape design in order to boost resale value. I’m doing it for ME!

    Calhoontuna, like you, when we bought our house I had trouble sleeping because it was so quiet. I had to open the windows to have the background noise of owls, peepers, and ‘coons to help me sleep. That noise is way better than my condo neighbor have sex at 3AM.


  3. I think that the 5% appreciation/year number that you are using to estimate seems to come from the mean price of houses in the US, not the appreciation of an individual house. That is, if houses keep getting built bigger, the mean price gets higher, but it is not your house that is appreciating at 5%. I think that quotes of mean price per square foot normalizes for this difference ( or the Case-Schiller index which looks at repeat-house sales, and they get a much lower number (1.2% real).

    But I totally agree that if you are in a field that enables you to live in a particular area for a long period of time, it would make sense to buy even if renting did put you a little ahead financially (in my bleak 1.2% yield world.)

  4. Not sure if you’ve mentioned this before, but is a great place to really geek out about real estate appreciation and costs.

  5. Sometimes it’s worth looking at both options even if only one seems to stand out as the best choice. If you don’t look at both, you could miss an unusual deal that would be the best option hands down. Maybe there’s a seller in the area that has had trouble selling, and will accept a low offer. Or maybe somebody’s kids went off to college but they love their house and don’t want to move.. So what do they do with the extra space? They rent it out on very lax terms for a cheap price. And since they’re still living there too, they are willing to make improvements since they own the house and will only be making their house better & more appealing. (The second situation just happened to me, and I’m very lucky to be renting it right now.)

  6. I agree…it’s our nest and the value is beyond $$$..
    Another point to take in consideration: some places (locations) are not or very difficult to find properties to rent…you can only buy them….not that they’re more expensive, but it’s just a community thing….and generally, very cool communities 😉

  7. I just saw Schiller just quoted 3% real for appreciation since 1987 (6% actual), which I assume normalizes for square footage.

  8. The house you purchase as your own living abode should never be confused as an investment, and should never be analyzed as one!

  9. Rick nailed it – a home is a place to spend your remaining years on earth, and not a vehicle to be used to get to retirement.

  10. At 6% appreciation, I reached the point where “buying was better than renting” in 8 years.

    But I don’t look at it as an investment and I’m perfectly happy spending more, in the short term AND long term, to live in a 2350 sq. ft. brand new house. This is compared to the 595 sq. ft. house I’ve been living in since I graduated college which is extremely below my means. For myself, I’m going to crack $110k this year at the age of 26 and my fiance will assumingly make $50k/year after graduating with her nursing degree this summer. $260k for a home didn’t seem to be outlandish at all, to me…

  11. If you’re comparing the mortgage on a 2350 sf house vs. the rent on a 595 sf house, I can see why it would take so long! Try putting in the rent of a 2350 sf house in your neighborhood instead. 🙂 Congrats on the new house.

  12. Ahh yes, my new place which I’m closing this week, would probably rent for $1500/month at least. Not really sure, I’ve always been an ultra-conservative renter during and after college so I never sniffed a place that cost that much. When I moved into the $595/month place I made a considerable amount less salary. Here’s to stickin’ it to headhunters in salary negotiations.

    Congrats on your new house also – looks pretty studly.

  13. This is an amazing resource, thank you for putting it together and sharing it. I’ve been looking for thoughts on renting vs. buying for some time.

  14. There is a saying I heard several years ago, “If you want to make God laugh, tell him your plans.” Buying a house vs renting is “not” all financial calculations. The decision is made based on your personal life style, needs, income and a host of other complexities that are strictly inherent to the individual. If holding a note, the amortization schedule on that note would dictate common financial sense to be in that house for more than 6-7 years. Here is the fun stuff, after a year in your new home, you wake up and find yourself to be an expecting father of twins. A joyous occasion. Until you realize the $/sqft difference you so shrewdly negotiated was base on the fact your new home is in the worst testing school district in the state. Now you have a decision, (well, let me tell you your wife has the decision, you are along for the ride). Now you are going to sell that house. Guess what? You were better off renting. Everyone’s situation is different. What I am trying to point out is life doesn’t work in binary code. There are intangibles that need to hold weight in that decision. Those intangibles are inherently unique to you, not your friend or anyone else. Let those intangibles speak at the next round table discussion in your mind before buying that house.

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