Validating my "Mortgage vs Renting" spreadsheet

[Nutria]

I developed this spreadsheet which tries to take all the factors of buying vs renting into account, including:

Property:

• appreciation
• taxes
• maintenance
• mortgage interest

Rent

• yearly rent appreciation of 2%
• renters insurance
• insurance rate is 1/4 property insurance rate

Other information:

• The home is worth $320K.
• Mortgage interest rate is 4%
• Payments are $1,360/month
• Cosing costs and Realtor's commission added to the mortgage
• tax millage is 0.11
• tax assessment happens every 5 years
• maintenance/repair is 2%/year
• Investment yield is 6%.
• Since it's more expensive every year to own a home, I also calculated the difference between the owning and renting expenses, and "made" the renter invest those differences every year.

The spreadsheet shows that over 30 years it costs $881,952 to own the home, whereas it costs $697,489 to rent, for a difference of $184,463.

In the end, it's cost the homeowner $882K to get a $1,317K asset, and cost the renter $697K to get a $409K asset.

For simplicity, assume that the owner and renter live next to each other in similar houses.

My biggest doubt is whether or not the maintenance expense should be 2% of the original value of the home, or the current value. (That makes a ginormous difference in the final numbers.)

Thanks

[james.hendrickson]

Wow - great Nutria! Thank you!

[disneysteve]

Nutria, you do make various assumptions that may or may not be true, especially over 3 decades. Also, the decision to rent or buy involves numerous non-financial factors too like how long you expect to be in the home. Very few people today stay in the same house for 30 years.

[Nutria]

Nutria, you do make various assumptions that may or may not be true, especially over 3 decades. Also, the decision to rent or buy involves numerous non-financial factors too like how long you expect to be in the home. Very few people today stay in the same house for 30 years.

How much would it change things? Your old house would be worth more, but so would the new -- possibly larger and thus more-than-inflation expensive -- one. The mortgage will be fresh again (and thus more closing+commission costs + front-loaded interest), meaning that your expenses would be even higher.

But yes, it's definitely imperfect.

[Thrif-t]

I've been thinking more and more about renting in retirement. I keep going back and forth. As the children leave the nest and I think about downsizing in the next 5 to 7 years, I'm now thinking about just staying put for the next 10. We'd be 63 @ 66. Maybe then sell and rent. I don't really feel that we'll live extremely long lives, maybe late 70s early 80s tops! The sale of the house should cover the rent for the rest of our lives.

I can't see moving twice, once to a smaller home, then again to an apartment. Just too much work! I'm not interested in a condo and watching my his fees go up and up and get less and less. Renting and being able to call a landlord to fix things seems better for us.

Plus I can't help but think how much easier it will be on the children once we pass. No house to clean out and sell. That was a PITA to do for my mother. So giving serious thought, as of late, to what our actual living arrangements will be in the next 10 years.

I'll be sure to check out your spreadsheet, thanks!

[riverwed070707]

Interesting comparison but some things seem unrealistic to me on both sides.

First, as a landlord, if my house payment is $1,359 there’s no way I’m renting that property for $1,400. I’d be losing money. I have a SFH that currently rents for $1,450 and my PI is $710 on a 15 year note and I consider it a low value investment. For a $320k house to be a “good” investment, it would need to be renting for AT LEAST $3,200/mo.

Second, where in this green earth can you buy a house for $320k and reasonably expect the value in 30 years to be $1.3. Is this normal appreciation in some places?

Third, I like that you took rent increases into consideration. curious what the rent of the home was at the end of the 30 years. Seems like it would be insanely high and Tenant would have moved to a different home to reduce living expenses. Most people don’t even get a 2% pay increase every year and I’d assume at some point that expense would have become unsustainable for the Tenant.

Even accepting all assumptions as true, in the end, doesn’t the homeowner come out ahead even though they spent more because they have a $1.3M asset and the renter only has $400k?

Just playing devils advocate. I actually love the idea of renting but in my current area it simply doesn’t make sense because property is cheap and quality, family home rentals are few and far between.

[disneysteve]

I've been thinking more and more about renting in retirement.

The sale of the house should cover the rent for the rest of our lives.



Plus I can't help but think how much easier it will be on the children once we pass. No house to clean out and sell. That was a PITA to do for my mother. So giving serious thought, as of late, to what our actual living arrangements will be in the next 10 years.

My mom sold her house 13 years ago and moved into a subsidized senior apartment building. Her monthly expenses are way lower than they were in the house. People often forget how expensive it is to own a home even after the mortgage is repaid.

And you're absolutely right about the cleaning out part. We helped her spend about a year cleaning out the house and it was a huge job. Now, when she's gone, we'll just have a 1-bedroom apartment to deal with which will be much easier. And we won't have to worry about selling it.

[disneysteve]

where in this green earth can you buy a house for $320k and reasonably expect the value in 30 years to be $1.3. Is this normal appreciation in some places?

Certainly not around here. We bought our house in 1994 for 142K. Today, if we are really, really lucky, we might be able to get 250K for it. More likely it would sell for closer to 220K. So well less than double in 25 years. Nowhere near your projection of increasing 4-fold in 30 years. I wish our house was worth upwards of 500K today but it's not even half that.

[Smallsteps]

I think there are pros and cons in both renting or owning and it can be up to the person i think when writing it out like this you could make either look as the better deal. the only thing i did not follow here is the 30 year thing if you were going to stay in a place that long why rent?
I knew a lady who did stay close to that long (renting) and in terms of landlords, the original one passed on / kids came in raised her rent as they wanted more then short time later they sold to another person again a raise in rent and changed terms etc. Each time her world was in upheaval as to what happens next.
There are simply too may what ifs to plan out a comparison for that length of time.
as people age i totally think many would be better off financially to rent a small place then try to keep up with expenses in a home.

[scfr]

Love the thought process behind this!

A couple other thoughts:

There are other costs that may increase with homeownership. Anything that is included in rent (trash pickup, yard maintenance, HOA fees, basic sewer fee, etc) you will have to pick up the tab for when you own a home.

On the other hand, some costs may decrease with homeownership. The one that comes to the top of my mind is pet-related costs. I'm currently renting and pay a monthly pet fee. You also won't face large unexpected costs when the owner of the home decides it's time to sell it - This one I think could potentially be big. What are the odds of a landlord NOT selling a house in a 30-year period? Seems kind of small to me but that's just a "feeling" not based on any actual data.

[Fishindude77]

If you're just talking about keeping a roof over your head and providing basic housing needs, I think renting almost always wins out financially vs ownership.
Owning a home allows you to customize and personalize things to your specific wants and needs which provides a whole lot of intangible value to many homeowners. For instance, we've got a deck with a hot tub and built in fire pit that we really enjoy, and I've got a huge workshop / man cave. Would be tough to find a rental like that.

[jIM_MI]

I developed this spreadsheet which tries to take all the factors of buying vs renting into account, including:

Property:

• appreciation
• taxes
• maintenance
• mortgage interest

Rent

• yearly rent appreciation of 2%
• renters insurance
• insurance rate is 1/4 property insurance rate

Other information:

• The home is worth $320K.
• Mortgage interest rate is 4%
• Payments are $1,360/month
• Cosing costs and Realtor's commission added to the mortgage
• tax millage is 0.11
• tax assessment happens every 5 years
• maintenance/repair is 2%/year
• Investment yield is 6%.
• Since it's more expensive every year to own a home, I also calculated the difference between the owning and renting expenses, and "made" the renter invest those differences every year.

The spreadsheet shows that over 30 years it costs $881,952 to own the home, whereas it costs $697,489 to rent, for a difference of $184,463.

In the end, it's cost the homeowner $882K to get a $1,317K asset, and cost the renter $697K to get a $409K asset.

For simplicity, assume that the owner and renter live next to each other in similar houses.

My biggest doubt is whether or not the maintenance expense should be 2% of the original value of the home, or the current value. (That makes a ginormous difference in the final numbers.)

Thanks

I love the topic and discussion.
In general I have heard over/under on renting is 7 years. If you live somewhere longer than 7 years, buying is "cheaper".

I think you need to add several factors for a numerical calculation

1) for renting, there is a deposit, and the loss of appreciation on deposit is not listed.
2) Real estate does not likely go up 5% per year.
3) Maintenance costs should be proportional to AGE of house, not just purchase price. First 10 years, the costs are close to zero, then at year 10 expenses
4) costs to liquidate house will be proportional to maintenance costs- a 5 year old house will cost less to sell than a 30 year old house.

[Petunia 100]

Certainly not around here. We bought our house in 1994 for 142K. Today, if we are really, really lucky, we might be able to get 250K for it. More likely it would sell for closer to 220K. So well less than double in 25 years. Nowhere near your projection of increasing 4-fold in 30 years. I wish our house was worth upwards of 500K today but it's not even half that.

In New Jersey? Wow, that surprises me.

The second home I bought with my now ex-husband, we bought in July 1998 for 92k. When we split, he bought me out and kept it. It appraised at 325k in August 2006. More than triple in only 8 years. Then the bubble popped, the price plunged and that house is worth maybe 275k today. So 13 years later and it has lost 50k.

Timing is everything.

[Petunia 100]

I developed this spreadsheet which tries to take all the factors of buying vs renting into account, including:

Property:

• appreciation
• taxes
• maintenance
• mortgage interest

Rent

• yearly rent appreciation of 2%
• renters insurance
• insurance rate is 1/4 property insurance rate

Other information:

• The home is worth $320K.
• Mortgage interest rate is 4%
• Payments are $1,360/month
• Cosing costs and Realtor's commission added to the mortgage
• tax millage is 0.11
• tax assessment happens every 5 years
• maintenance/repair is 2%/year
• Investment yield is 6%.
• Since it's more expensive every year to own a home, I also calculated the difference between the owning and renting expenses, and "made" the renter invest those differences every year.

The spreadsheet shows that over 30 years it costs $881,952 to own the home, whereas it costs $697,489 to rent, for a difference of $184,463.

In the end, it's cost the homeowner $882K to get a $1,317K asset, and cost the renter $697K to get a $409K asset.

For simplicity, assume that the owner and renter live next to each other in similar houses.

My biggest doubt is whether or not the maintenance expense should be 2% of the original value of the home, or the current value. (That makes a ginormous difference in the final numbers.)

Thanks

Well, prices for parts and maintenance go up steadily over time, no matter what you paid for your house.

The spreadsheet is great, but is it accurate? We won't know the true price appreciation for either rent or home values in any given area until the next 30 years have gone by. You can make a reasonable guess and that's all you can do. Your estimates may well be reasonable for your area, but the future may not look like the past.

[Captain Save]

Spreadsheeting ends up giving you one scenario out of millions.. however if you have taken the time to walk yourself through a spreadsheet, you have thought about the advantages and disadvantages and it helps you make a more informed decision... At the end of the day though, a math problem would not give you the answer, your intuition will , as well as other non financial factors that someone else mentioned...