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Rent vs. Buy?

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Red Pear Jack
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11:33p, 6/26/23
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One of the many debated topics in the housing market is if its cheaper to rent or to buy?

Well, thanks in part to recent rate increases and higher than average value increases in single family over the past 3 years, there are only four cities in the US where its better to buy than rent, one of those being Houston. According to Redfin, Philadelphia, Cleveland and Detroit are the other three.


So why Buy? Should we just rent forever? Is renting better? This is a question that I'm always trying to answer and while there are many factors (geographical flexibility, no repair costs, etc.) Is that financially the better choice? I don't know...and its an answer that varies by person and situation and assumes you have the ability to buy in the first place.

However, I was bored and I put together the following spreadsheet to analyze different scenarios and see how they affect the breakeven period where owning starts making more sense. Versions of this are available online but I didn't really find any that would let me audit or apply the calculations to account for different ownership costs. You can toggle different things as mortgage rates, loan terms, HOA costs, annual maintenance expenses and so on..

Selfishly, one of the interesting takeaways I found is how using Red Pear to both list and sell your home can accelerate the breakeven timeline. For example, in my base scenario using Red Pear for both sides of the sale can accelerate the breakeven period by 2.6 years (5% selling costs (1.5% rebate at purchase plus 1.5% listing fee at sale) vs. 8%; both include other fees for title/repairs/closing costs at time of sale)

Curious to see what takeaways y'all will find

*This is v1, if there any inconsistencies or errors in the sheet let me know so I can fix.
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bloom
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6:49a, 6/27/23
This (rent vs buy) is always the question-thanks for the document. I think your homeowners insurance cost is too lowor I want the name of your agent.

Owning/renting need an "intangible asset " line that can be filed in by each buyer. A line where they can try to tie a monetary value to each option.

Owning and not being at the mercy of a landlord, being able to make the home my own, let my pets be pets etc has greater value to me than having someone else responsible for repairs and maintenance, but the dollar value of no maintenance worries would not be zero. I would like to be able to plug in whatever dollar value I attached to these into the chart.
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htxag09
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8:24a, 6/27/23
AG
I like this analysis.

I think one important point is the breakeven is 6 years in this scenario, shorter than I would have expected, but longer then I think most think.....

Home appreciations have been pretty crazy the last few years which would shorten that. But at the same time people have been upgrading homes every 3 or 4 years it seems like because they "have so much equity now."

It just helps show it's not a straightforward, "it's always better to buy" like people want to make it out as....

Edit: I'd also say the insurance is too low. Our home is a lower value than your scenario and our insurance is significantly higher when you consider home and flood (not in a floodplain).

2nd edit: wouldn't it make more sense to start the renter off with the 20% they would have been putting down on a house invested? If someone is looking to buy a house vs. rent and has the $100k down payment, that $100k would likely be invested if they chose to rent. Unless I'm missing something....
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JobSecurity
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8:31a, 6/27/23
AG
Agreed more than doubled the insurance estimate formula but that's going to vary for everyone anyway

I added a day 1 total monthly ownership cost calculation to the assumptions box just to have an easier apples to apples comparison of the monthly difference (ie in this scenario rent is $X/mo less than owning)

What struck me was how sensitive it is to home value growth rate. I knew that intuitively, but playing with this shows it's really the only factor that drives the breakeven in any significant way. A 1% change in home appreciation rate can change the breakeven by years.

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500,000ags
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11:33a, 6/27/23
AG
Pure $ and cents, renting wins IME. Home ownership is like forced savings. You spend and spend on projects and maintenance with very little ROI, but after enough time there is some level of equity available.
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NoahAg
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12:59p, 6/27/23
Ok, I think the true answer is ...........................





....it depends.

We fell into a great house at a great price at a great time 3 years ago. Will certainly come out way ahead over renting during the same timeframe.
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Red Pear Jack
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In reply to htxag09 • 9:45p, 6/27/23
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Quote:
2nd edit: wouldn't it make more sense to start the renter off with the 20% they would have been putting down on a house invested? If someone is looking to buy a house vs. rent and has the $100k down payment, that $100k would likely be invested if they chose to rent. Unless I'm missing something....
This is a good point, and it makes sense. You have the money saved up so in theory should be added in.

I tweaked the invested amount to include foregoing the down payment and in that case you never breakeven with buying on the base assumptions. However, if you increase rent to $4,500/month then you breakeven in 3.25 Years. I updated the file to assume the down payment is invested when you rent.

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Red Pear Jack
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9:49p, 6/27/23
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Another interesting takeaway is that under the base scenario (without making the change for investing the down payment) the power of compound interest eventually takes over and makes owning more expensive than renting (month 217).
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htxag09
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8:19a, 6/28/23
AG
Not sure I'm understanding the breakeven anymore.....

I look at it this way.....

Take line 74, end of 6 years, if I would have taken that $100k and invested it, then calculated and invested everything I've been saving by subtracting my rent from mortgage, insurance, expense fund, etc. I'd have $206K in savings.

If I had bought a house, I'd have a house worth $597K, less closing costs to sell so $549K. I owe $370K on my mortgage. So if I were to sell I'd have $179K. So would not yet break even....
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JobSecurity
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In reply to htxag09 • 12:08p, 6/28/23
AG
htxag09 said:
Not sure I'm understanding the breakeven anymore.....

I look at it this way.....

Take line 74, end of 6 years, if I would have taken that $100k and invested it, then calculated and invested everything I've been saving by subtracting my rent from mortgage, insurance, expense fund, etc. I'd have $206K in savings.

If I had bought a house, I'd have a house worth $597K, less closing costs to sell so $549K. I owe $370K on my mortgage. So if I were to sell I'd have $179K. So would not yet break even....
Maybe I'm confused too but here's what I think

The calcs in the spreadsheet are messed up but the main difference is you're not accounting for the monthly payments.

To fix the spreadsheet the Net Ownership Balance shouldn't subtract the down payment. If that is subtracted you should also subtract it from the Net Rental Cost (this would just be calculating profit/loss from original 100k 'investment').

So the correct formulas would be:
Net ownership cost = sale proceeds - total cumulative monthly payments
Net rental cost = total savings balance - total cumulative monthly payments

So in your example, you need to subtract 6 years of rental payments (298k) from the 206k savings = -92k
The sale proceeds after 6 years would be 179k minus the total payments including maintenance (351k) = -172k

With the given assumptions it would take almost 28 years to break even. Again this is extremely sensitive to home appreciation rate; increasing that to 5% instead of 3% changes it from 28 years to 9.5.


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htxag09
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In reply to JobSecurity • 12:37p, 6/28/23
AG
JobSecurity said:
htxag09 said:
Not sure I'm understanding the breakeven anymore.....

I look at it this way.....

Take line 74, end of 6 years, if I would have taken that $100k and invested it, then calculated and invested everything I've been saving by subtracting my rent from mortgage, insurance, expense fund, etc. I'd have $206K in savings.

If I had bought a house, I'd have a house worth $597K, less closing costs to sell so $549K. I owe $370K on my mortgage. So if I were to sell I'd have $179K. So would not yet break even....
Maybe I'm confused too but here's what I think

The calcs in the spreadsheet are messed up but the main difference is you're not accounting for the monthly payments.

To fix the spreadsheet the Net Ownership Balance shouldn't subtract the down payment. If that is subtracted you should also subtract it from the Net Rental Cost (this would just be calculating profit/loss from original 100k 'investment').

So the correct formulas would be:
Net ownership cost = sale proceeds - total cumulative monthly payments
Net rental cost = total savings balance - total cumulative monthly payments

So in your example, you need to subtract 6 years of rental payments (298k) from the 206k savings = -92k
The sale proceeds after 6 years would be 179k minus the total payments including maintenance (351k) = -172k

With the given assumptions it would take almost 28 years to break even. Again this is extremely sensitive to home appreciation rate; increasing that to 5% instead of 3% changes it from 28 years to 9.5.
The rental payments are already subtracted in my example. They're taken out of what you're saving. His column X is what is being added to savings every month. Column X is costs that would be required in home ownership minus rent.

I didn't subtract the maintenance, etc. from the sale proceeds because they're being represented above.

I'm not showing a what did you "gain" or profit necessarily, but what position would you be in under either scenario after 6 years.

I ignored the net ownership balance column in my example.
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JobSecurity
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In reply to htxag09 • 12:52p, 6/28/23
AG
yeah that makes more sense. I made it way too complicated
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Red Pear Jack
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1:08p, 6/28/23
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The new spreadsheet has the down payment added to the investment column. Does that solve the issue?
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Red Pear Jack
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In reply to htxag09 • 1:14p, 6/28/23
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The residual value is backing out the sales transaction costs (realtor fees, title fees, negotiated repairs, etc..)
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malenurse
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1:57p, 6/28/23
AG
My son used this rationale a couple of weeks ago. He and my DIL bought a "starter" approx 4 years ago which has now nearly doubled in value.

He wants to sell that house and then move into one of my rentals. He is not worried about paying rent and having no equity because, in his words " When you die I get the house anyway"
The last thing I want to do is hurt you. But, it's still on the list.
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Red Pear Jack
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In reply to malenurse • 4:07p, 6/28/23
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He's playing chess while the rest of us are playing checkers
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Kyle Field Shade Chaser
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In reply to 500,000ags • 11:27p, 6/28/23
AG
My home value has increased in value over 10 years by $150,000. I definitely have not put $150K in projects into this home. I've remodeled two bathrooms on my own $12K and replaced and A/C $7K.

The mortgage, Insurance, property taxes, lawn care and HOA get passed onto the renter in the cost of rent. So that's a wash.

I pay a mortgage as an owner that I'll recoup when I sell or my kids sell. That will include a major increase in the homes value. It's a no brained to me. If you can afford it, buying a home is the ways to go.

If I didn't have kids I'd consider the buy and flip approach after 2-3 years. Good way to make some extra money.

Buying and owning rental properties is a great form of cash flow in retirement if you get the properties in your 30's and 40's.

Only way renting is better is if you cannot afford to buy a home and think you can invest in other vehicles with a better return. My 401K hasn't increased $150K in returns over 10 years I know that.

I'm likely going to take some 401K and get rental properties for retirement cash flow. Get those properties paid off by 60. 401K returns aren't cutting it. We will all be working until we are 70.
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htxag09
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In reply to Kyle Field Shade Chaser • 8:41a, 6/29/23
AG
Durkin Nowitzki said:
My home value has increased in value over 10 years by $150,000. I definitely have not put $150K in projects into this home. I've remodeled two bathrooms on my own $12K and replaced and A/C $7K.

The mortgage, Insurance, property taxes, lawn care and HOA get passed onto the renter in the cost of rent. So that's a wash.

I pay a mortgage as an owner that I'll recoup when I sell or my kids sell. That will include a major increase in the homes value. It's a no brained to me. If you can afford it, buying a home is the ways to go.

If I didn't have kids I'd consider the buy and flip approach after 2-3 years. Good way to make some extra money.

Buying and owning rental properties is a great form of cash flow in retirement if you get the properties in your 30's and 40's.

Only way renting is better is if you cannot afford to buy a home and think you can invest in other vehicles with a better return. My 401K hasn't increased $150K in returns over 10 years I know that.
I'm likely going to take some 401K and get rental properties for retirement cash flow. Get those properties paid off by 60. 401K returns aren't cutting it. We will all be working until we are 70.
I completely agree that being a landlord and having rent flowing in completely changes the conversation.

But, for the discussion in this thread, which is primary residence, this blanket statement simply isn't true. And this is coming from someone who greatly enjoys home ownership, who'll likely always own a home, and isn't currently in the market for a new home. But I'm not doing it because I think it's the best investment for my money. I know it isn't.

There will be situations where renting is better financially, there will be situations where owning a home is better financially. I'd wager if people really looked at the $$$ they'd find the former true, especially in today's environment where people move every 5 years.
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BoDog
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10:02p, 7/2/23
AG
Both sides indeed have merit. What you have to consider and ultimately cannot always control is the timing. Ie, when you buy and when you sell.

For example, I built a house all in for 1.45mm in 2019-before things went bat **** crazy and got very expensive.

Due to a work relo, we sold earlier this year and doubled our money even after commissions. Now I am well aware for every story like this there is another where the timing was terrible and someone lost their ass. If you purchased a home in 2021-22 its likely going to be years and years before you can get some nice cash out of it.
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94chem
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In reply to malenurse • 11:59a, 7/3/23
malenurse said:
My son used this rationale a couple of weeks ago. He and my DIL bought a "starter" approx 4 years ago which has now nearly doubled in value.

He wants to sell that house and then move into one of my rentals. He is not worried about paying rent and having no equity because, in his words " When you die I get the house anyway"
Tell him you're gonna live to 100, you're not doing any maintenance, and it's all his if he can just live there for 50 more years.
94chem,
That, sir, was the greatest post in the history of TexAgs. I salute you. -- Dough
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LMCane
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In reply to htxag09 • 5:27a, 7/6/23
exactly

one of the major reasons to rent rather than buy (after I just sold my home four months ago) is that I can take the money I gained from the sale and invest it for the next hopefully 30 years.

and rent is cheaper than the mortgages right now.

on the other hand, it would be nice not to have to worry about moving every few years.
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Harkrider 93
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In reply to Kyle Field Shade Chaser • 11:21a, 7/24/23
AG
The best way to compare is with percentages.

If you paid $150k for the place, then your return is about 7%/yr. Take off another 1% if you account for the bathrooms and A/C.

The S&P 500 has made over 12% over the last 10 yrs.


Still lots of things to account for with the above. but it reflects a much better comparison.
As the waves roll, the eagle will fly to the setting sun.
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TheBonifaceOption
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1:46p, 7/24/23
Renting = you are paying into someone else's equity.
Buying = you are paying into your own equity.

The only real benefit to renting is it forces you not to pay for more house than you actually need. But as one person said buying a house is forced savings, to that I sarcastically *gasp* because the alternative is no savings, and the rent keeps indexing to inflation. Home purchasing can get locked into a 30yr that is based on the relatively-deflated dollars of the origination date.
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Tex117
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In reply to htxag09 • 4:20p, 7/24/23
AG
htxag09 said:
Durkin Nowitzki said:
My home value has increased in value over 10 years by $150,000. I definitely have not put $150K in projects into this home. I've remodeled two bathrooms on my own $12K and replaced and A/C $7K.

The mortgage, Insurance, property taxes, lawn care and HOA get passed onto the renter in the cost of rent. So that's a wash.

I pay a mortgage as an owner that I'll recoup when I sell or my kids sell. That will include a major increase in the homes value. It's a no brained to me. If you can afford it, buying a home is the ways to go.

If I didn't have kids I'd consider the buy and flip approach after 2-3 years. Good way to make some extra money.

Buying and owning rental properties is a great form of cash flow in retirement if you get the properties in your 30's and 40's.

Only way renting is better is if you cannot afford to buy a home and think you can invest in other vehicles with a better return. My 401K hasn't increased $150K in returns over 10 years I know that.
I'm likely going to take some 401K and get rental properties for retirement cash flow. Get those properties paid off by 60. 401K returns aren't cutting it. We will all be working until we are 70.
I completely agree that being a landlord and having rent flowing in completely changes the conversation.

But, for the discussion in this thread, which is primary residence, this blanket statement simply isn't true. And this is coming from someone who greatly enjoys home ownership, who'll likely always own a home, and isn't currently in the market for a new home. But I'm not doing it because I think it's the best investment for my money. I know it isn't.

There will be situations where renting is better financially, there will be situations where owning a home is better financially. I'd wager if people really looked at the $$$ they'd find the former true, especially in today's environment where people move every 5 years.
Its this.

So many people get wrapped up in "homeownership" (which is really just an outward manifestation of their ego.) You pen and paper it (and depending on your life situation, ie, need one for a family), more often than not, renting a joint well below your means and investing the cash in SPY (or something similar) is going to give you a better return in the long run.

This simple fact...homeowners can't seem to get their head around. Sure, there are some exceptions to this. But as a general rule...the above is true. Plus...you can just set it and forget it. House stuff..woof man...always effing with it.
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MS08
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7:28p, 7/24/23
AG
And saying, well my home is worth $150k more now, especially in a 5 to 10 year time horizon is too simple of a way to look at it and a misinterpretation of actual dollars.

How much did you spend in interest, property taxes, insurance, repairs & maintenance, remodel/improvements, etc. versus how much tax savings did you experience? Then, in order to access that $150k, you have to sell, and you are in the wheel all over again, most likely with a bigger house now and an increase in the above expenses.

We have made a choice to not buy homes and invest all the "homeownership capital (more than just down payment)" in real estate development deals.

Different strokes for different folks. Not sure there is a right answer and, to me, it is very situational. Is it possible that the banks created homeownership and sold it as the "American Dream?"
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