My wife sent me a link to calculate the cost of renting vs buying a home the other day, which was basically a pitch from a home builder about why owning a home is so great. If you believe the calculations, buying the home with the prices we would consider is save us $1,075,638 after 30 years.
On the surface, it sounds like we’ve got to jump on this home buying bandwagon that everyone else is on. After all, who would turn down 1 million dollars of savings? Looking at it further though, and there are many flaws with this calculation.
First, although it has a box to put in a percentage for home value appreciation, it assumes that the property tax amount is the same for the entire 30 years. Unfortunately, this is just wrong. We will probably never get a new assessment of property tax every year, but we can bet that the property tax will increase with the home value over the long run.
Second, it assumes no cost associated with obtaining a loan. This is again incorrect. When a loan is made, there are upfront closing fees that just need to be paid. Some people end up taking a bigger loan to cover the closing costs but this is still money paid up front that could be earning interest in our saving accounts.
Third, buying a home usually accompanies a huge down payment. This is money that would otherwise be earning interest. This might sound like a small detail, but the down payment could more than double at 3% a year after 30 years.
Fourth and last (there are more, but let’s stop here since I think we see the point), it doesn’t say anything about the higher monthly payment that we have to come up with if we decide to buy. This situation stays the same for years before rent appreciates enough to surpass it. The extra cost of owning a home for the first many years could’ve been invested or saved, which would further cut into the perceived savings that the website is leading us to believe.
If we look at the calculation of owning vs renting more carefully, owning a house might actually be more expensive after 30 year if we include the extra cost of maintenance!! Hopefully, no one falls for the calculation in the link above thinking that they are saving a million bucks by buying a home now.
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{ 24 comments… read them below or add one }
I don’t put too much stock in these types of future calculations. However, I’d much prefer to buy than rent. And you can buy a place and pay the same monthly payment that you could rent something for. It may not be quite as nice or as spacious, but you can find something that will work.
You have to wonder if it’s worth renting a nicer place, or owning something you can live with. Just a few thoughts.
great blog man.
However, I dont really agree much with you on this topic. Everyone should own a house to call home.
If you’re renting, and you lose your job, you could pretty much be homeless after a few months of bad luck. However I’m sure you’re covered with insurance from the bank in case you’re in the middle of a loan and you lose your job.
Also, the fact that the article considers the property tax to be the same over the next 30 years could be compensated with the fact that a person’s salary also increases every year.
Anyways, keep up the great work, i really enjoy reading your articles.
Don’t forget about the cost associated with maintaining your home. This can add up quickly.
I plan on living longer than the next 30 years myself. What does the calculation show for 50 or 60 years of owning vs. renting?
To reiterate what’s been said, the one thing never factored into these calculations is the maintainance associated with owning. You cannot possibly guesstimate the costs of repairs, replacing appliances, furnishings, insurance, and so forth. Even if you own long enough to get rid of the mortgage, the expenses will ratchet up just when you REALLY can’t afford them.
You also cannot anticipate the changes in the character of your neighborhood. For many people, what was once a nice bedroom community has turned into a suburban slum. Its tragic, but happens to many many neighborhoods over a lifetime.
Even having owned our home for 20 years, I would never recommend either of my kids buy a house (at least in the next 5 years or so). Its insanely, and unpredictably expensive.
Fortunately for me, I didn’t nickel and dime property taxes and closing costs and bought my condo as opposed to renting.
After only 2 years I cashed out $40,000 in profit after fees and mortgage payments while the people who rented left with nothing but higher rents. I’m sure glad I wasn’t “logical”.
The whole debate between buying vs. renting is very market dependant. I would probably not buy right now, where I live. But I’m not buying now, I bought 4 years ago.
If I were to cash out now, I would make an easy 60-70k profit (after all the costs). My mortgage payments are similar to the rent my friends are paying for smaller places. The only difference is my payments will remain roughly the same or go down, and there’s will rise indefinitely.
Since I’m already “in the market”, it’s relatively easy for me to move around, as long as I do it at the right time. A mortgage term isn’t much different than a lease in that respect. The difference is, I can upgrade my accommodations without increasing my monthly payments (if I do it right), but if I were renting, the payments would go up every time.
The fact of the matter is, renting is a business. The owner has to cover the costs of maintenance, taxes, and financing, in addition to making some sort of profit to make the whole thing worth while. Don’t think for a second that the price you pay for rent isn’t more than what the owner is paying to own. The thing to remember is that time is the major differentiator, not logic. And don’t counter with “he had a big down payment”, because in the business of renting, that’s the “wrong way” to do it.
Prices are up, rent, prices are down, buy. Once you get in, you can move when the prices are high.
Very nice analysis Ryan. You’ve got a lot of good points.
Hmm…interesting points brought up in this post. I’ll make sure to remind my self of this. Thanks!
-Mike
You seem to make valid arguments here, but just for the sake of my own curiosity, are you factoring in at all the tax deductions you get to take from all the interest you pay on that big loan?
And I have to agree with Ryan, after I pay off my 30 year loan, I have my house fully paid for and don’t have to pay for it ever again. You just can’t say that about renting anything.
Have to say, I totally disagree with you.
I rented for many years. Rents go up every year, when you rent, don’t like it you move, hence moving expenses, deposits (that you rarely get back), etc.
You build NO equity when you rent. You have no stability when you rent.
I am paying close to the same amount in my 15 year fixed rate mortgage for a modest 3 bedroom house, then I was paying for a 2 bedroom apt. 9 years ago!
The difference being yes I have to fix my own household problems(plumbing, gardening, appliances, painting, etc.) And yes I have a fund I budget for those items.
Yes I get to choose what appliances, plumbing, gardening, painting, I WANT to have, rather than someone else choosing for me…
Rent increases–where as since I have re-fi at a lower interest rate, my monthly payments have decreased. Every apt. I have ever lived in, the rent went up every year.
Had I invested the orginal downpayment I put on my home(less than 20%), I would not have come anywhere near what I currently have in equity in my home. (purchased my home in 1999 and even with the crappy market now, my home value has doubled since the original purchase price).
Real estate taxes, and mortgage interest are tax deductible. Rent is not.
Of course, in 15 years, my only household payments will be home renovations, taxes and insurance. Far less than what I would paying in my area to rent an apartment, let alone a house.
Of course, there is the having a stabel neighborhood (your neighbors tend to move in rentals), the school district is better, etc.
I firmly believe that my financial life, and my quality of life, would be worse off, if I had not purchased my home, and continued renting.
I’d forgotten you guys (Americans) get to write off your interest. That makes it even better to buy than rent, I’d say. But being a Canadian, I’m not familiar with what other differences there are..
The biggest problem of buying a house is the “down payment” Once you are able to give the down payment, it is really a good option. Because you only pay kind of a rent(Home Loan interest payment) and soon you will have your own property. And don’t forget, real estate prices keep booming.
I think that, for the long term (at least 5 years) you are always better off buying than renting.
Even if the appreciation and tax breaks just cover your closing costs and interest, and you end up out your real estate taxes and maintainance costs.
The taxes and maintainance, when spread out per month, will be less than the monthly cost of renting the equivalant property.
Praveen is right about that. If you are looking at buying a house then moving in less than 5 years, you need to stop that line of thought right now.
Unless you are planning to make major improvements to the home for the sake of flipping it for a large profit quickly. A friend of mine does just that in the Memphis, TN area and makes a good living on it.
But for the casual guy who is looking to buy for a home and not a project. Look long term or don’t look at all.
You really save big when you buy your own house. Renting cost a lot and saves you nothing for yourself.
Buying a house is like an investment. It lessen your expenses like renting and the like.
I am going to have to respectfully disagree and recommend buying versus renting for the long term.
The most important points are rents are going to keep going way up and as Ryan accurately said, it’s after 30 years that there is no comparison.
If anyone is interested in a more detailed analysis, I have written a post called “Worst Financial Advice I have ever Heard”.
I don’t understand the post that says, “If you’re renting, and you lose your job, you could pretty much be homeless after a few months of bad luck.” In my view, if you have a mortgage, and you lose your job, you ALSO could be pretty much homeless after a few months. Can someone please explain this myth to me? I hear it all the time, but it makes no sense. When you “buy” a house, you are really entering into a different species of rental agreement in many respects. Sure you can make structural changes, paint the wall, drive in nails, etc… but, it is an illusion that you “own” the house…the Bank owns it…a fact that you will painfully learn if you miss a few mortgage payments.
Further, the important point that is being missed here is that if you invest the delta between the rental price and the sale price, there is little gained by “buying” a house in my estimation. I think there is a lot of pure propaganda that goes unquestioned. The real estate industry is tied at the hip the multi-trillion dollar credit industry. They have literally thousands of agents and lobbyists out there dispensing the Kool Aid. The subprime mortgage mess is just an offshoot of the larger problem which is that the credit industry is continually looking for new ways to turn you into an indentured servant. Be wary…they are serpents, and they never sleep. Just my $.02.
Pat, you can either borrow against the equity you’ve built up (risky), or you can sell the house to recover the equity. Both should give enough “quick” cash to let you rent for a few months while you figure things out. Of course, the whole argument should be moot since you should have several months of expenses saved up somewhere.
As for investing the delta, rental prices are partially based on what the landlord is paying for their mortgage. That money delta is really a time delta expressed in dollars; the change in rates between when they bought and what the current market is.
Ryan,
Good points and thank you for the response. I guess the answers are ultimately market-specific. A lot of people in my area have no equity because they entered into these interest-only mortgages. So, they are still on the street if they can’t pay up…(but more likely back with Mom and/or Dad).
Further, if they sell the house now, many of them would have to sell significantly under the purchase price, so there is no help there.
In my area, the delta between rental rates and mortgage payments (for the home we rent) is roughly $1,500.
I recognize that this means that a lot of people made a lot of money over the years in real estate. I’m not arguing with that point. The problem that I see is that the last 5 years or so (in my market) seemed to be similar to a game of musical chairs. Things were great while prices kept appreciating, but now the music has stopped and a lot of people are scrambling. I never understood how housing appreciation could stay at a steep trajectory indefinitely, while salaries were at a very modest incline. The delta between those two trajectories was greater and greater every year until recently. There was just bound to be a time when people were no longer willing to pay such a large percentage of their salary for their mortgage payments.
I agree with your last point. However, it seems like it all depends on appreciation. If I invest the delta for the next five years, and the housing appreciation flatlines (or only modestly rises…or declines), I am better off at the end of those 5 years than if I bought the house…assuming the investments appreciated. The delta alone in my area would be $90,000 over those 5 years…$1,500 x 12 months x 5 years). (Again, that’s with zero growth). That seems to take the argument back to the stock market v. real estate debate. Which goes on and on and on…
Thanks again for your response…I appreciate it and welcome any other responses.
My wife and I rent a very nice upscale condo near the beach that is located in a golf course community.
We have rented this same unit for 4 years, the rent has NEVER ONCE increased during that time. (we have also never once been late with the rent during that time)
We RENT our condo for $750 a month. Our only other bill is our power bill which has never been above $60 a month even with us running everything 24/7 full blast. Cable, High Speed Internet, Water, Garbage Collection, Pest Control, and ALL MAINTENANCE is INCLUDED in our rent.
SO we are paying $800 a month to live here in LUXURY and SECURITY with FREE maintenance. We pay NO Taxes, NO insurance, No Maintenance, FREE Cable, FREE High Speed Internet. We recently needed to have our AC unit replaced, we called maintenance and within 4 days we had a Brand New Very high end AC unit installed and working beautifully. The Cost of this new system? $4300!! Cost out of my pocket?? ZERO because I rent. If we OWNED then I would have had to pay this myself, instead the owner pays it.
I NEVER have to spend a second of my time on Landscaping, painting, repairs, etc.
Anyone who owns in my community pays HOA fees. For my particular unit the HOA fees are just under $350 per month. This includes landscaping, cable, internet, etc.
So by renting my wife and I do not pay: Property Taxes, Insurance, HOA Fees = $350 a month here, Maintenance of any kind including appliances, Water/Sewer, CABLE, INTERNET.
If we owned a house we would be paying WAY more than the $9000 a year we spend on housing.
Another example:
Lets say someone is taking home AFTER TAXES $25,000 a year. (You would need to earn about $37,000 a year to do this)
They can RENT and spend $750 a month on housing = $9000 a year.
OR They can OWN and spend $1500 a month on everything that goes with home ownership = $18000 a year.
If they rent, they have $16000 a year left over to invest with, play around with, have a fun life with. No need to BORROW money from banks, you have plenty of cash to live on. You can live DEBT FREE and have fun in life.
If they OWN they only have $7000 a year to live on after paying for the house. SO like most home owners they put everything they have into their house so to make up for the lack of income they BORROW off the equity to make up for it and LIVE IN DEBT paying interest forever.
Tax deduction for interest payments?? GET REAL.. You pay $1.00 in interest to deduct .10 cents from your tax bill.
Great post and great examples.!! Its really sad that so much of the “gotta-buy, gotta-buy” real estate crowd (mostly members of the real estate/credity industry) control so much of the public information on this topic. I love watching CNN/MSNBC/Fox etc and seeing some “real estate expert” preaching the real estate bible with their zombie eyes and constant refrain about the “American Dream.” What a pile of bollocks!! You know what my American Dream is? Being wealthy and financially free…not being on the verge of bankruptcy inside a house I can’t afford that is stressing me out. Home Ownership = American Dream. Puhlease! Just a BS ad slogan from the real estate/credit industry.