If you can’t tell, I can be quite a numbers geek and might be enjoying my new calculator a little too much. In fact I’m considering pulling out my PHP web development skillz and programming a dedicated page to the rent vs buy calculator. I think it’s a great tool for anyone considering buying or selling a home. If you’re dedicated to trying to retire as fast as possible and assumed buying was the way to go, you may just be surprised. On the other hand, even if you prefer home ownership and are willing to pay the extra anyway, this information just may change the size or type of loan you go for.
If you would like me to run a calculation for you or just want to let me know you’d be interested in a dedicated calculator page, let me know.
True Cost of Owning a Home – Part 3
I’ve fine tuned this calculator pretty well. Yesterday I mentioned I would run a more apples to apples real world calculation. This calculation includes:
- A $200,000 home($160,000 mortgage) vs $1300 per month rent
- 20% down on the home VS investing that cash in index funds while renting
- 4% APR 30 year loan
- $3600 per year in property tax
- $600 per year in home insurance
- $4000 per year in home maintenance and upgrades
- 2% inflation affects everything except your mortgage payment
- 7% average expected return on the market
Cost of housing graph:
Housing vs Investing
Rules of the graph:
- Blue line shows if we rented at $1300 per month and invested the $40,000 that didn’t get spent as a home down payment
- While renting is cheaper, the blue line invests the difference you save
- While owning is cheaper, the red line invests the difference you save
- While either is more expensive it subtracts the extra cost you’re spending
- It includes your equity in the home growing as well as your $200,000 home going up in value each year at 2%
This graph shows you’re better off renting the first 20 years, but if you did buy a home, it pays off pretty well in the end. You’re investments don’t run away as they did in yesterdays simulation even with your investments instantly starting off at instantly with renting. I noted that if you push the rent cost down just $100 per month, the wealth you gain while renting already takes off just as it did in yesterdays simulation.
Here is a situation where someone can call the home an investment, although it takes 30 years to see the rewards.
As I noted though, if you push the rent even just a $100 lower, renting becomes the better option to your short and long term net worth.
I’ve been contemplating some of the rules I have set for calculating the wealth graph. The numbers I’m considering changing do not seem to change the results much though.
7/18/2015 Update: I just ran across Go Curry Cracker and he also did an almost identical calculation on rent vs buying recently. His results are approximately the same, uses the same methods and shows the results are repeatable. He also points out many benefits of renting that are worth noting even if you’re willing to doll out the extra cash to own a home.