Renting vs. Buying/Owning (which is better)

6 Replies

Let’s look at an example of renting vs owning.

For simplistic purposes let’s say you are considering buying a home for $250,000 at 4.25% (current interest rates 2018) on a 30-year mortgage vs. renting an apartment for $1,250 per month. The monthly taxes on the home we will assume are $400/month, insurance $75/month and repairs $2,500/year. Let’s also assume you are going to live in the home for 15 years. Over that 15 years the home will appreciate in value on average 2% per year. Rent on the apartment will also increase 2% per year. Let’s make these other below assumptions:

Own

20% down payment to avoid PMI (private mortgage insurance)

Monthly payment is $980 (principle & interest) + $400 (taxes) + $75 (insurance) = $1,455 per month

Total interest paid at the 15-year mark = $108,000

Balance owed at the 15-year mark = $130,000

Mortgage amount is $200,000 ($250,000 – 20% down payment of $50,000)

House will appreciate to $330,000

Total repairs over 15 years = $37,500

Total insurance over 15 years = $13,500

Taxes over 15 years = $72,000 (assuming no increase, which is highly unlikely) 

Rent

Total rent paid over 15 years = $250,000

No repair or insurance cost

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Now let’s dive a little deeper into these numbers. Over the 15-year time period you lived in the purchased house you will have spent $50,000 on the down payment, $70,000 on reducing principal (equity), $108,000 in interest, $37,500 in repairs and $13,500 on insurance and $72,000 on taxes. This is a total of $351,000 out of pocket expenses…. now let’s say you decide to sell your home for the $330,000 it is now worth at year 15. The purchase price was $250,000 so that leaves you with a $80,000 gain…right? Well, sort of. The $130,000 still owed gets paid back to the bank. Leaving you with $200,0000 but you also have to pay back yourself the $50,000 down payment so you are now left with $150,000. Subtract out the interest, taxes, repairs and maintenance you paid of $232,000 and you are left with a loss of -$82,000. Sooo after that longer than anticipated math problem you ended up losing $82,000 over the 15-year time period. Some will say that it is worth the loss because you get to own your home, etc. Some will say the calculation is skewed because homes and rent prices are different across the country. THIS IS JUST AN EXAMPLE, please don't loose sleep over it. Others will say it’s not worth it because of the time value of money (being able to invest the down payment elsewhere). That being said, when renting, it’s a zero sum game, in my opinion. In the example above, as a renter you would have paid roughly $102,000 less over the 15-year time period compared to buying. Regardless, we are all on Bigger Pockets for a reason. Hence, investment property! 

@Brian M Sweeney , not only is this a terrible deal to buy (as your point suggests), but it's more so a terrible deal as a rental for $1,250 per month (0.5% of purchase value). If we ran the same numbers on someone trying to rent this out, they would loose $205 a month from the start. I would take that into consideration as well. 

Now, let's say you decide to rent this property out at a more accurate number. How much would you request a month for rent? With that assumption (the number of your choosing), let's say that it's cash flowing... Could you be saving that extra money and investing it into something else as well (as it accumulates, as if you purchased it for ownership)?  

Also, lets say you decide to live there for another 15 yrs. or the rest of your life (it's someones forever home), would it be worth it than, given the ability to save that extra money that you would have been saving. Obviously this is all market dependent, but this person did just receive a low interest rate on a home they may see themselves living in until their final days. As was the intent from the beginning. Does this change things?

This is an interesting topic that has been discussed before, and I appreciate you bringing it up.

@Brian M Sweeney I might have missed it, but when you sell you have 6% realtor fees as well. And in some places like Washington and Maryland you can pay an additional 2% in transfer taxes and if you sell to someone who is using FHA you give up yet another 2% as concessions.

It's a good reality check for people. Thanks

And of course, in the event of hyper inflation, "there's no place like home" a commodity will retain it's relative value while Venezuelan or Zimbabwean dollars will not ;-)

I agree with @Matt Crusinberry . Assuming you are comparing the same house you bought as the same house you are renting then this example comparison is not a fair comparison at all. 

I entered your numbers in the rental calculator and did a report here: https://www.biggerpockets.com/calculators/shared/1064494/957d856e-b69c-4ee6-80dc-8b0a86ed3b0b As you can see no one would rent that house at the mortgage cost, which the report shows, because you are losing $367/month. But, actually, you are saying its renting BELOW mortgage costs. Your 250k of rent over 15 years is only  1388/month vs the 1455/month in mortgage payment costs. 

What that shows is you would have to rent that house out for at minimum $1922/month (assuming you only want to make only $100/door/month). So that brings your rent up to $345,960 over 15 years. Almost $100k MORE than what you budgeted for. So that -$82k vs renting just turned into a positive $13k vs renting. 

I also think your taxes are way high and you dont count for tax breaks on the home. You don't account for rent increases (which you mentioned), repairs that you as a renter have to do, rental insurance, or the likely hood that you wont move to a different place for 15 years. But I wont get into any of that for simplicity sake. I would also like to point out that no one buys theres primary residence with the knowing guarantee that they will make money when they sell it. This market right now is a bit of the unusual with prices just climbing but I dont think you should count on it like that. 

Originally posted by @Brian M Sweeney :
@Nik Moushon this was a article that someone posted about renting a apartment vs buying a primary residence. This was not about investment property.

Does it really matter? Because someone is considering it an investment property. Even if its a mom & pop owner they have to account for all the additional costs that any investor would or at least most of them. Even if you take out PM fees and adjust for better taxes, it still is losing money. At least if you are going to compare buying vs renting the EXACT same home. Someone owns it and they will not rent it for a loss. You might as well compare renting a studio apt vs owning 4 bed house then because its just as unrealistic. More of an extreme but still unrealistic. 

I think my biggest disagreement with this example is the even though its trying to keep the numbers "simple", they only keep it simple for the rental. There is a long item list of expenses for the home owner and none for the renter. How is this realistic or fair? If you are going to count taxes, which I think are double for most of the country and especially for the prices you are working with, then you should also count tax breaks and depreciation. Just to give one example. 

I rent for under 3k mo and the property probably worth 6-650 plus a HOA.

I took my small (ca standards) down payment money and got some stuff out of state and put chunk in the bank. Short version I get about 400/door after expenses that helps offset and lower my rent here even more