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Home > Rent Vs. Buy

Rent Vs. Buy

November 11th, 2007 at 04:55 pm

In case you ever thought I was full of crap when I said it was clearly cheaper to buy our first home and why we were eager to buy so soon. On a monthly basis it was FAR cheaper than renting. (Keep in mind dh and I kept our rents down to $400/month combined through college and 1 year out as a means to save up a substantial down payment. He lived with parents and I lived with roommates in a more "rent controlled" situation. Th average studio apartment was $1100/month at the time. I rented a huge room in a big house in a nice neighborhood but roommate had been there for a long time and so my rent was very low for the 6 years I did rent).

Home #1:

"Your home purchase breaks even after 0.2 years.

This is based on your home's equity minus a 6.00% sales commission paid to brokers or real estate agents when you sell your home. It also assumes your home will appreciate at 3.00% per year and you have an income tax rate of 25.00%. If you cannot remain in your home for at least 0.2 years you should consider continuing to rent.

We calculated your breakeven point by examining how long it would take to create enough equity in your home to exceed the value of investing your cash on hand. We also accounted for differences in your monthly rent and house payments. If your rent payment is less than your net house payment, we add that monthly savings to your investment. If your house payment is less than your rent payment we subtract that amount from your investment. You may notice that on the schedule at the bottom of this report the investment value can be reported as negative. This happens if your house payment is significantly lower than your rent payment. It illustrates that if you continue to rent the extra cost of renting would, in effect, use up your cash on hand.
Loan Information

Your total monthly payment was calculated as $1,867.39. Your down payment was calculated as $50,000 and you had a home price of $260,000. This is for a 30 year mortgage at 6.000% in the amount of $210,000. Total closing costs for this loan are estimated at $2,000.00.

Your current monthly rent is $2,800. The expected inflation rate of 3.10% annually was used to estimate future rent and property taxes.

Text is The rate of return use for investments was 10.00% per year after taxes. and Link is
The rate of return use for investments was 10.00% per year a..."

Also note that that condo is worth today, a mere 8 years later, what the calculator projects it will be worth in about 2027 years. When you factor housing returns, it paid off even faster. You can argue housing is volatile, but the Bay Area has a long track record of large house appreciation. I don't expect it to be worth only $500k in 20 years, no matter what the market does. Unless the Bay Area becomes a waste land or something...

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Our second house works out to be about the same though rents are considerably cheaper.

"Your home purchase breaks even after 1.2 years.

This is based on your home's equity minus a 6.00% sales commission paid to brokers or real estate agents when you sell your home. It also assumes your home will appreciate at 3.00% per year and you have an income tax rate of 15.00%. If you cannot remain in your home for at least 1.2 years you should consider continuing to rent.

We calculated your breakeven point by examining how long it would take to create enough equity in your home to exceed the value of investing your cash on hand. We also accounted for differences in your monthly rent and house payments. If your rent payment is less than your net house payment, we add that monthly savings to your investment. If your house payment is less than your rent payment we subtract that amount from your investment. You may notice that on the schedule at the bottom of this report the investment value can be reported as negative. This happens if your house payment is significantly lower than your rent payment. It illustrates that if you continue to rent the extra cost of renting would, in effect, use up your cash on hand.
Loan Information

Your total monthly payment was calculated as $1,647.61. Your down payment was calculated as $68,000 and you had a home price of $290,000. This is for a 30 year mortgage at 5.750% in the amount of $222,000. Total closing costs for this loan are estimated at $2,000.00.

Your current monthly rent is $2,500. The expected inflation rate of 3.10% annually was used to estimate future rent and property taxes. The rate of return use for investments was 10.00% per year after taxes."

It will also be worth what it is today in 25 years according to the calculator. I am not sure how much Sacramento as a whole will support higher housing prices. Curious myself. But um, future appreciation played no factor in our decision to buy. Our house already decreased in value $150k this last year and is still an easy $200k more than we paid in 2001.

If we rented the 2nd time we could have put $100k in the bank (at age 25). We still were better off buying. Even if we assumed the house only grew 3%/year.

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I never said I wouldn't consider renting in retirement. When inflation is out of the equation. It would probably be the only way to enjoy all the money we earned on our house. Of course we intend to at least downsize in retirement. We really liked owning a condo and it was an interesting way to enjoy home appreciation while keeping costs down. (Or course we paid more for utilities, homeowners insurance and for homeowners fees in our condo. Property taxes were the same. & our current house is twice as big. So things aren't very apples to apples when you move hours away. We moved to limit all of these costs, which were ironically much higher in a small condo in an expensive city. I will take my big house any day. But a big house didn't stretch us - it was a way to simplify for us. Just an illustration how wildly these numbers will vary due to different factors. & why I get tired of hearing how bad big houses are. Our "big house" just might be our key to financial freedom at a very young age. Wink ).

1 Responses to “Rent Vs. Buy”

  1. Livingalmostlarge Says:
    1196267043

    It really depends on where you live. The millionaire mommy next door, must live in a HCOLA with cheap rents, thinking SF. Because you don't rent houses in Boston for $1400 like her examples. Out here 3 bedroom townhouses are about $2500. $1400 gets you a studio maybe without parking.

    Second, it definitely doesn't make sense to rent in low COLA. Why would you rent if you could buy a home fo $100k or less? You'd have to rent for $600 or less and most of those places I've heard cost at least that much.

    I don't think buying is the best scenario in all cases, but it is area dependent. MMND couldn't respond to people who had homes that were $100k or $200k even. Their numbers seemed to show home ownership won out.

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