Rent vs. Buy

[cr]

A while back someone posted a message with a link to a very straight forward rent vs. buy calculator that graphed out your break even point in comparing the cost to rent and the cost to buy.

I’ve looked for the link, and I am pretty sure I saw it on this site but I cannot find it. I’ve found a lot of others but I recall this one being very simple, but it made the point very clear.

If anyone knows what I am talking about and has the link I would greatly appreciate it.

Thanks.

[rb_engineer]

Hmm…

Say you had 20% down payment. In 2004-2005, you can get 30yr fixed for ~5%. That’s $1481 per month which $300 goes to your principle. Even with property taxes and HOA you are probably under $2000. If you then count tax deduction and the principle you are paying off (>$500), aren’t you financially better off than paying $1500 for rent? I guess you can argue that the house has lost in value but that was paper gain anyways. Also, since you held the house for less than 2yrs and with fees you probably netted less than 30K, right?

[rb_engineer]

Hmm…

Say you had 20% down payment. In 2004-2005, you can get 30yr fixed for ~5%. That’s $1481 per month which $300 goes to your principle. Even with property taxes and HOA you are probably under $2000. If you then count tax deduction and the principle you are paying off (>$500), aren’t you financially better off than paying $1500 for rent? I guess you can argue that the house has lost in value but that was paper gain anyways. Also, since you held the house for less than 2yrs and with fees you probably netted less than 30K, right?

[stansd]

This is the best one I’ve seen…only bad news is that you have to register with the New York Times if you haven’t already.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?ex=1185336000&en=92a35496df194374&ei=5070

Stan

[stansd]

This is the best one I’ve seen…only bad news is that you have to register with the New York Times if you haven’t already.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?ex=1185336000&en=92a35496df194374&ei=5070

Stan

[davelj]

We actually had a decent-sized thread about this a few months back. I forgot what the general consensus was, but my argument, in summary, was that a rational person should be willing to pay at least a 20% premium to comparable rents in the form of monthly ownership costs (mortgage interest + HOA + taxes + insurance, etc.). The logic is that there is some benefit to the interest deduction (although often less than people think) and, more importantly, over the long term you don’t have to worry about paying a higher rent each year, which is the norm, particularly in California. This really adds up from a present value standpoint. Once you factor both of these issues into the equation you come up with a decent-sized premium. Then many people would add in a “peace of mind/settled” intangible premium to the dollars and cents premium – this will vary from person to person. I think sdrealtor thought a 50%+ (total) premium was in order (which for some people might, in fact, be the case) while I was more in the 20%-30% range. The bottom line is that the average, rational person (absent special circumstances) should be willing to pay some premium over the comparable rent in order to own. The issue is what the premium should be and it will vary from person to person. For the most part, in my opinion – and most here obviously agree – that the “ownership premium,” as it were, is waaaaay too high.

[davelj]

We actually had a decent-sized thread about this a few months back. I forgot what the general consensus was, but my argument, in summary, was that a rational person should be willing to pay at least a 20% premium to comparable rents in the form of monthly ownership costs (mortgage interest + HOA + taxes + insurance, etc.). The logic is that there is some benefit to the interest deduction (although often less than people think) and, more importantly, over the long term you don’t have to worry about paying a higher rent each year, which is the norm, particularly in California. This really adds up from a present value standpoint. Once you factor both of these issues into the equation you come up with a decent-sized premium. Then many people would add in a “peace of mind/settled” intangible premium to the dollars and cents premium – this will vary from person to person. I think sdrealtor thought a 50%+ (total) premium was in order (which for some people might, in fact, be the case) while I was more in the 20%-30% range. The bottom line is that the average, rational person (absent special circumstances) should be willing to pay some premium over the comparable rent in order to own. The issue is what the premium should be and it will vary from person to person. For the most part, in my opinion – and most here obviously agree – that the “ownership premium,” as it were, is waaaaay too high.

[cr]

Stansd, that looks like the one I was referring to, thanks a lot. And thanks for the other comments guys, it’s actually for family members that are considering buying.

I am currently in a 2Br for $1100/mo, and just moved from the unit next door where I paid $750/mo for three years. No increases. I have never owned so I have no equity, just saving for a down payment.

Vrundy you touched on this, and I agree. One reason not to buy now is unless you got a well below-market price, you’ll lose more equity in the next few years as prices drop. Everyone seems to think renting is a waste of money, and that’s the mindset I am addressing and that link will help.

Thanks again guys.

[cr]

Stansd, that looks like the one I was referring to, thanks a lot. And thanks for the other comments guys, it’s actually for family members that are considering buying.

I am currently in a 2Br for $1100/mo, and just moved from the unit next door where I paid $750/mo for three years. No increases. I have never owned so I have no equity, just saving for a down payment.

Vrundy you touched on this, and I agree. One reason not to buy now is unless you got a well below-market price, you’ll lose more equity in the next few years as prices drop. Everyone seems to think renting is a waste of money, and that’s the mindset I am addressing and that link will help.

Thanks again guys.

[CAwireman]

Coop,

Try this link for a Rent vs Buy calculator.

http://office.microsoft.com/en-us/templates/TC010566171033.aspx?CategoryID=CT101444811033

Don’t know if this is it, but good luck.

HiggyBaby

[CAwireman]

Coop,

Try this link for a Rent vs Buy calculator.

http://office.microsoft.com/en-us/templates/TC010566171033.aspx?CategoryID=CT101444811033

Don’t know if this is it, but good luck.

HiggyBaby

[temeculaguy]

Here’s an easy way to figure out all the little details, Just look at the P&I vs. rent. The principle and interest doesn’t take into account the hoa, taxes, maint, ins., etc, but the tax deduction is about equal to all that so just compare the principal and interest to the average rents. When it is an absolute tie with a 20% downpayment it is time to buy, this represents a 20% margin over rent. If rent is 1900/mo then 360k is the correct price using this formula, adjust up and down based on current rents in the chosen area and house size. a purchase price of 600k is justified if rent is $3160, if rent is cheaper, then rent.

[temeculaguy]

Here’s an easy way to figure out all the little details, Just look at the P&I vs. rent. The principle and interest doesn’t take into account the hoa, taxes, maint, ins., etc, but the tax deduction is about equal to all that so just compare the principal and interest to the average rents. When it is an absolute tie with a 20% downpayment it is time to buy, this represents a 20% margin over rent. If rent is 1900/mo then 360k is the correct price using this formula, adjust up and down based on current rents in the chosen area and house size. a purchase price of 600k is justified if rent is $3160, if rent is cheaper, then rent.

[Reality]

Hmm…

Say you had 20% down payment. In 2004-2005, you can get 30yr fixed for ~5%. That’s $1481 per month which $300 goes to your principle. Even with property taxes and HOA you are probably under $2000. If you then count tax deduction and the principle you are paying off (>$500), aren’t you financially better off than paying $1500 for rent? I guess you can argue that the house has lost in value but that was paper gain anyways. Also, since you held the house for less than 2yrs and with fees you probably netted less than 30K, right?

Hmm…

So where’s the the lost interest on the 20% down payment in your calculation?

Why not just pay cash for the house. Then the monthly nut will be REALLY low. LOL.

Paper gain? Until the place was sold. Turned into real gain.

[Reality]

Hmm…

Say you had 20% down payment. In 2004-2005, you can get 30yr fixed for ~5%. That’s $1481 per month which $300 goes to your principle. Even with property taxes and HOA you are probably under $2000. If you then count tax deduction and the principle you are paying off (>$500), aren’t you financially better off than paying $1500 for rent? I guess you can argue that the house has lost in value but that was paper gain anyways. Also, since you held the house for less than 2yrs and with fees you probably netted less than 30K, right?

Hmm…

So where’s the the lost interest on the 20% down payment in your calculation?

Why not just pay cash for the house. Then the monthly nut will be REALLY low. LOL.

Paper gain? Until the place was sold. Turned into real gain.

[Author]

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