Home Ownership, Should I Buy Or Should I Rent, A Calculation

A few days back I was invited to a colleague’s housewarming party. My head has been spinning ever since I visited his house. The guy started his career around the same time I did. He bought a 4-bedroom house in (still expensive) south Florida with a yard large enough for a mini soccer match, as well as space for a butterfly area (I saw a few butterflies, too).

I am living in a rental condo apartment. I do have enough savings for the down payment required for a similar home, so I started thinking about buying one. I spoke to my wife in the evening about it, and she agreed that this is a good time to buy a home.

I still wasn’t convinced, as home ownership has various other costs associated with it. Insurance, housing society fees, home security, property taxes, water, and increased electricity costs would cost $800 per month in addition to the mortgage payment.

If I buy a new home

I calculated my expected cost and total payout amount at the end of the loan term for both a 15-year mortgage and a 30-year mortgage.

30-year mortgage

A decent 3 bed, 2 bath single family home in our area costs $250K – $300K. For calculation’s sake, let’s keep my dream home value at $300K. If I pay 20% down, the remaining amount of the loan, i.e. $240k at 4.5% fixed, would cost me $1,200 per month. Using a mortgage calculator

I will have made $432K in overall payments including interest at the end of 30 years.

15-year mortgage

To pay off a $240K mortgage in 15 years, I have to shell out $1850 per month at the same mortgage rate as above. This means I have paid $330K in total by the end of 15 years.

This means if I can afford, I can save $100K (432k – 330k) in interest payments just by going for a 15-year mortgage as opposed to a 30-year mortgage.

 

The big question now is, can I pay $800 (homeownership related costs) + $1850 (mortgage payment) = $2650 per month?

I pay $1200 toward rent right now, so, essentially I would have to pay another $1450 per month more for homeownership, which I can afford without cutting back any budget or comfort.

If I continue to rent for 15 years

I have $60K (which is set aside for a down payment) in various Fidelity bond and stock funds. I can continue to add the above $1450 per month ($17400 per year) in to those funds. A compound interest calculator tells me that I can have about $500K in these funds at the end of 15 years at 5% rate of return.

If I purchase my home after 15 years, paying down that entire amount, a similar home would probably cost me $400K (that’s $150K more than current price) considering inflation and a better real estate market than today’s.

 

This calculation method ensures that the same $2650 is going out of my checking account every month, whether I buy a home or continue renting.

There is another financial benefit of home ownership – I can save on taxes to Uncle Sam! For a loan of $240k, I would pay less tax, and if I invest that money in the same Fidelity funds every year, I can have about $50K of savings at the end of 15 years just from the lower taxes.

So, in all, if I buy a home now I will pay $330K in 15 years and have $50K in tax savings, plus a home with some equity. On the other hand, if I continue to rent and save the rest, then in 15 years I will have saved $500K, considering today’s $250K home will then cost me $400K, I will still have saved $50K!

I have read many arguments favoring buying as opposed to renting a home so far:

1. Renting is throwing money away – After 15 years of renting I can still consider buying a new home and will have more money in home equity as I will buy a newer home 15 years from now.
2. Home prices will appreciate – I factored in $150K toward this appreciation in my calculation; it still shows renting is better.
3. Buying a home brings stability in life – I would argue against that, as buying home would severely impact my ability to move, possibly impacting my potential to earn more salary.

Conclusion: Financially, for my situation, renting is by far a better option.

Clearly, I couldn’t convince myself to start looking for a new home. When I showed this calculation to my wife, she brought up a few good points which I was not able to counter argue.

1. Didn’t we all dream of owning a dream home during childhood? Yes, a beautiful bungalow on the beach with coconut trees. A swimming pool in the backyard. A garden with flowering plants and a section for fresh produce and herbs.

2. Owning a home enhances social status. It is not true for me and may not be true for you, but my wife feels that way and others may agree. In order to socialize with successful and established people, perhaps we need to have our own home or. Otherwise we may be considered outclassed.

3. Renters live with restrictions. I agree with this 100%. We can’t even put a nail in the wall without asking the owner. We can’t alter anything, including the landscape on a rented property. We don’t own the space, as simple as it sounds!

I will buy a home sooner, but not for improved financial health. Rather, it will be for the emotional benefits of homeownership. Remember, One Cent at a time is not merely a journey toward financial betterment. It is a step by step process toward being rich financially, socially, emotionally and spiritually.

If we can’t feel rich and enjoy our money’s worth, why are we saving and investing? Even after 15 years of renting, the calculations would still reflect that renting for 15 more years is a better option!

What will you suggest, readers? Should I buy or should I continue to rent?

is a husband and working as a software professional for a Fortune 100 corporation in Florida. Thanks for visiting the blog.

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Comments

  1. says

    You have assumed that your rent is unchanged during the 15 year interval and that you would continue to save $1450 per month. How accurate is that? A better housing market with inflation would likely increase your rent. Also, do you really think the additional costs are $800 per month? That sounds a bit high to me. If that is the case, your landlord is losing money like crazy. Maybe property tax and insurance is more than that in Florida, but my monthly expenses for those items is about $450 or so.

    • says

      I knew this was coming, didn’t think this will be the very first point. I have been living in this part since last few years and my rent didn’t actually go up. Well, only $50 to $100 in my area in last 5 years. Agreed the owner would want us to increase rent, then I will be again in the market for a cheaper rental. Many owners just don’t get a tenant for months and they are usually ready to rent out at a lower place, consistent advertising in craigslist got me result in the past.

      Second point, I would expect my income to grow and I should be able to pay the increase in rent without affecting savings goal. yes the property tax in my county is steep. For a 2 room condo, my owner is paying around $700 including association fees and water. She only makes $500 per month from my rent.

      Thanks for your comment!

  2. says

    This topic is such a hard one to answer. I have always found myself torn on which way to go. I have found that it depends on where you live and what rents cost. In some places, rental fees are higher than what a mortgage would be.

    I personally like owning a house better for many of the reasons you suggested. I like my freedom to do what I want. I also like knowing that I have an asset which can work in my favour.

    I do agree though; a person needs to do what is best for their financial situation

    • says

      Thanks Miss T for your comment. I found it hard to answer too, hence did all that calculation. As I said for me buying home is not for financial benefit. If I go for 30 year mortgage, I willr ather lose money to buy home. Are you renting as well?

    • says

      this what I’m looking for! should I buy or rent a home? I guess buying a home is good to go if you can afford it.. renting is more expensive in the long run, why rent when you can own a home to get what you want for your house.

  3. says

    Wow, what a great article. Before reading this, I had assumed the conclusion would be to buy a home because of the equity that you would build up in your home. Very challenging, although I am not sure how guaranteed the 5% return is. I personally can’t afford home ownership right now, but have been leaning towards home ownership. I can definitely understand staying with the rental option though (now).

    • says

      Your situation might not be same as mine. State tax rate, property price, rental price and your priorities might differ from mine. Always best to do your own calculation. One thing for sure, if you are not paying a significant chunk of money upfront or not opting for 15 yrs mortgage, you are paying a huge interest over the years.

  4. says

    It’s a different situation for everybody. Me and my fiance wanted to buy this perfect house we found and then found out that our debt ratios were too high to get approved and now we have no choice but to rent. Maybe for a year or two so we can save up and reduce our debts

    • says

      Try to save as much as you can to put down more down payment.Start svaing towards this down payment from today. It’s 200% gain when you earn interest rather than paying it for mortage.

  5. says

    We did a 30 year mortgage because it by doing so, we are paying about what we would to rent a similar place. Yes most of what I am paying is interest (and property taxes and insurance) but I am slowly paying down the debt too. For me, I’d rather pay 4.75% over 30 years and be able to pay down other debt (student loans) while still putting money in retirement. It would make no sense to me, to say I can afford to buy if I use the 30 year but since I can’t at 15, I’ll pay the same amount as the 30 year to rent and get nothing in the end.

    • says

      As I said my situation might not match with others, still I am amazed to know your that your rent payment and payment on house are same. You might want to relook at your finances as well. Check to see how much interest you are paying on student loan and how much interesting you are getting on retirement saving. If student loan or mortage rate is higher, I would stongly suggets you stopping saving for retirement till these loans are paid up. Once you are debt free, your retirement saving can grow my leaps and bounds. Do a calculation soon.

      • says

        My loan is at 5.75% for my SL, my husband is still in grad school so his loans are deferred for the next 3 years, my mortgage rate is 4.75% and I have a personal loan at 3.5%. I’d rather be paying more into my retirement. Once my husband graduates that may change but for now, retirement savings is my choice.

          • says

            Invest in stocks/bonds does not mean I am losing 1% of my money. Buying now, when the stock market is cheap will benefit me more than paying down a 5.75% debt which is also tax deductible as are all but the 3.5% loan.

  6. says

    Rent will go up, but I see that you discussed it above already. Have you looked at a duplex? That is a good alternative and will give you a foothold into the rental property investing.

    • says

      buying a duplex is something I never thought about. Let me do a research on it first thanks for pointing this. But for initial thought, I don’t think I am ready to rent out a portion of the property i am living in, and that too, my tenant will be physically to close to me..

  7. says

    To start with, I think renting is probably the way to go unless you are planning to buy a house as an investment.

    However, I think your reasoning may have been a little off. The spread in your renters payment versus mortgage payment is essentially the principal payment (average of 1,333 over 15 years). It’s still an outflow of cash, but probably not entirely accurate to think of it as added cost or expense. While the housing market is not looking good, it’s probably not a good idea to assume it couldn’t come close to matching your 5% rate of return (especially since the market is at record lows).

    Depending on your faith in the stock market versus housing market, you could argue it’s an even money proposition from an investment standpoint, except renting doesn’t have as many benefits.

    BTW, I do think your $800 in extra housing costs is a fair guess!

    • says

      Shaun, I calculated housing price to grow @ 3% and stock market @ 5%, isn’t it the historical average, after factoring in inflation? And in 15 years span the rate of growth tend to coincide with the historical growth. In other terms in 15 years span I can expect history will repeat itself and housing and stock will grow at 3% and 5% respectively.

      Do not miss the point on hgome equity though, 15 yrs from now I’ll have a newer home with higher equity.

      • says

        SB – I greatly appreciate the clarification and your patience with me, but I still believe, based on the 3% increase in home costs that you are making a mistake in your analysis of the investment options.

        Based on the percentages you gave me, you are financially no better renting. $300,000 at 3% annual return over 15 years is $467,000, plus your estimated $50,000 in tax savings. This puts you at a net value of $517,000, which is pretty close to break-even.

        Your point about higher equity is not actually viable either since you could use your tax savings for an addition or something to bring the equity up.

        The point about the newer home holds water, if it is an important selling point.

        The fact that there isn’t a benefit to renting and investing as an alternative to homeownership should be logical. All the costs of home ownership are built into your rent, plus roughly a 10- 15% ROIC for the landlord. The spread between the two options just isn’t great enough to prove a winner. This is why I was a bit skeptical of your calculations.

        I think the stronger point you made earlier is that renting isn’t throwing money away.

        Sorry for the essay here.

        • says

          Shaun actually enjoying the conversation. JD at GRS so far had this type of analysis on his posts. Glad I am having it here. You may be right as we are getting closer and closer to break even, but if housing remain depressed or there’s a stock market boom in store, renting would be better and vice-verse.

          All long before this calculation I had been thinking that by renting I am throwing money away, but now at least I can say I am not. And renting really saved as housing lost 40% value over here since 2007, saving my a.. in the process :) great conversation Shaun! Really appreciate this.

  8. says

    I really like your logical thought process, as you have outlined above. One positive aspect to your planning is the deposit that you have saved. It is still possible to purchase a home and qualify for a mortgage with little or no deposit. However this option basically means the real estate investment is a break-even prospect at best due to the high total interest and payback compared to the asset value at the end. The other issue is the mortgage interest tax credit. This has been debated as an option to increase tax revenue, by removing this as a tax credit. It didn’t go through in the latest round of adjustments, but if the deficit doea not improve very quickly and debt remains out of control, I think this would disappear.

    • says

      If mortgage interest tax credit goes away, there goes $50k from my calculation making renting even better. Yes we might say difference of $50k over 15 years as break even, but still $50 is a lot of money, isn’t it?

    • says

      As I said I don’t agree to it, I still don’t agree to it. Even if we live in apartment, we live quiet well and comfort, am sure you do too.

  9. says

    Terrific discussion and logical breakdown of the numbers. I am a renter and live in southern California. Homes are pretty expensive out here. I agree with the other readers, you have to choose what is best for your financial situation. I visited Texas recently and homes that go between 200 to 300K would be a million dollars in CA. Everyone has different priorities and we should listen to them to guide us whether to rent or to buy.

    • says

      Sure Buck, the ide behind this post was to let others know about my way of thinking about the biggest financial decision of life. I hope this will encourage others to think it through and calculate before the decide on to buy a new home. South Florida is different, from Calli, a Texas $250K home would cost $750 easily. I lived in Austin for a few years I home I considered here for calculation would have costed only $150 there. Definitely this decision depends on your own situation.

  10. says

    I’ve been considering buying a home too, only I make my calculation on a monthly cost basis, and I would be able to have a tenant live with me too. As far as I can see, it doesn’t make much sense for me to buy a home now, because I’d like to move from here in the next 5 to 10 years, so the home would probably only be worth it if I hung onto it and rented it out, and I don’t think I want to be a landlord from afar.

    However, I have a larger dog, and it’s tough to find a shared home with only one other tenant around here. (Most are 3 BR 2BA and you share a BA). So mostly I want a home for the control it would give me over who I live with, and what kind of dog I can have there.

    My conclusion was essentially that economically, it doesn’t make sense for me, but it might be worth it for my mental health.

  11. Geek says

    I too am a renter, but something about your calculations doesn’t sit right with me.

    Most importantly, you talk about buying a 3×2 “Dream home”. Does this dream home have parallel stats (size/sqft/beds/baths/yard/etc) to your current condo/apartment? You said heating, etc, would go up, so I assume that the condo/apartment is smaller than your dream home.

    In order to fairly compare renting vs. buying, you should compare the same size/bedrooms/situation (ie a Condo, not a stand alone house) to be fair.

    Perhaps the price difference still holds.

    Regardless, you should do whichever you prefer. I choose to justify renting instead of buying with the mobility option.

    • Geek says

      Also, I would appreciate thoughtful comments especially if you’re going to link back to yourself from my blog. I let it through this time.
      I know my posts are brief, but that doesn’t mean you need to be!

  12. Bob L says

    One of the mistakes that many rent/buy comparisons have is comparing buying a house, versus renting a house. A more likely scenario is renting an apartment vs buying a house.

    I have been renting for 13 years. Prior to this I was paying small rent to my father in exchange for helping keep his house up. I frequently analyze my situation and the rent/buy decision. 13 years ago, house prices were very low here, as was the interests rates. Right now, in this area, most house prices have not gotten to what would be considered low. From the start, I calculated how much it would cost me for a house including heat, utilities, everything. I took this money out of my pay and put it into an account. I used this account for rent etc. In the 13 years I put money away, I have saved enough, even with the roller-coaster stock market to just be able to afford a house. My GF for most of that time, paid about a third of the housing costs, but then, if I was alone I would have been in apartments that were 30% cheaper. I still calculate the cost of buying, and still put that money away. Every time I do the analysis, the outcome depends on what assumptions you make relative to the future. So…… Since I really don’t want to be tied down to a house, and I don’t want to do all the work involved, renting still makes the most sense, by far, for me.

  13. skiz says

    As everyone has suggested, it varies. Home ownership does have it’s benefits. Consider this.

    I am frugal also and I have been a home owner for 10 years. I have refinanced, so unfortunately I am not very far into my new 30 year loan (but saved myseld a ton of long term interest). I have worked my way from 95% LTV when I purchased, to about 70% LTV, some due to appreciation (despite a not great market), most due to hard work. Up to this point, yes, my housing costs were a bit higher than if I had rented, but as my family grows, I’m glad I planned ahead. Plus, if all of that cash had been tied up in stocks and bonds, it probably wouldn’t have done a whole bunch in recent years.

    So now, even as my family has grown, my monthly housing expenses have remained more or less constant, although I do need to keep some cash for repairs, etc. My home now will rent for approximately $400 a month more than my owes (not even considering tax benefits). Even with unexpected expenses, this is enough that if I needed to move, etc., I could either sell it or rent it comfortably. So I don’t consider myself tied down — at least in a financial sense.

    For me the questions are now slightly different — to refinance again to 15 years since the rates are down near 3% (lower interest but higher monthly cash flow requirements)? to rent out my home and trade up? and how much of a trade up is a prudent investment / diversifying out of pure stocks/bonds vs. overspending on housing costs? Or do I pay off my home entirely?

  14. says

    I live in Los Angeles where there are guest houses aplenty! I have one behind my home that I rent out. That income almost pays my mortgage!

    This is a great way to buy with very little inconvenience. If there is no guest house, look at a duplex or a house that you can add on to. One friend added a room (an “efficiency apartment”) to his house for his aging mother. if the math makes sense, invest in that and rent it out – for fun and profit :)

  15. Gwen says

    My husband and I have always had a tenant. Even now with our house paid off, we have a completely separate apartment (a coach house) rented out. We spent the time finding great tenants. Now our son and D-I-L have a small bungalow and a basement apartment. The tenant covers the mortgage. They just have to cover property taxes, utilities and maintenance. They have put in a bunch of sweat equity and their house – in two years – has gone up 30K.

    • says

      This is good to know Gwen. The area I am living in has seen one of the biggest price drops. Still the price is stagnant and probably haven’t reached bottom yet.

  16. says

    Very interesting read. I’ve been doing the maths on a related post myself, (haven’t published it yet). The one thing I find interesting is that your rent is so much less than the monthly cost of your own home which I find strange.
    Over here in the UK, all things being equal, it’s almost always cheaper to buy than rent, after all, the landlord has to cover their mortgage and costs too. In fact, part of the criteria for getting a buy to let mortgage is whether the valuer reckons the going rate for a tenant exceeds the mortgage payment + 15%. Besides, if you are serious about making money off renting a property, why wouldn’t you rent it out at close to the equivalent mortgage rate, even if the mortgage was paid??
    There is one other factor though, what happens to the money after the mortgage is paid off? If you continue investing the same as your old mortgage payment amount you’d soon catch and surpass the renter in net worth, as they will still be paying out each month when your mortgage is done and dusted.

  17. says

    This is such a huge debate in the personal finance arena. I think you are right in saying that it depends on the individual’s situation. If you are locked and set on staying in an area then I would buy but if you are unsure of your future better to rent and leave your options open.

    • says

      The answer is essentially not a computational one as many have pointed out here it does depend on a multitude of variables vis-a-vis your circumstances. That said circumstances can change hugely with time along with an accompanying shift in priorities, Toss a coin or use the force.

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