Is It Better to Rent or Buy?

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

by ovechtrick • 12 years ago

408 246 12 years ago

jleyank• 12 years ago

I said this when such a thread came up the last time: If you can (easily) switch jobs without moving it might make sense to buy. If you can't, however, renting is the safer option as you can move if/when there is a problem with the job. Domiciles can be rather illiquid at times, which sucks when you need to move for work.

It's a separate question if it's worthwhile to buy at all, as that's dependent on geography, present and future market trends, lifestyle choices, ...

jaredmcateer• 12 years ago

Indeed, my wife and I both are pretty much equals when it comes to our careers, we both find them fulfilling and enjoyable, but they are completely different focuses. If one of us were to get a job offer that required us to move, we would have to be certain the other could get a job of equal value there as well or the job offered would have to be about twice as good as the current. So it made the decision to buy much easier and it hardens us against jumping from job to job simply because the grass may look greener.

hkmurakami3• 12 years ago

Some people say "oh you can always rent the house out!" but they often forget that once they move away and have to hire a property management firm, the fees that they'll have to pay will erode the rent revenue below breakeven with the mortgage payments (without such a manager, you can frequently break even or better vs mortgage)

vonmoltke• 12 years ago

First, it depends on the rental market. Unless the local housing market deflates, after several years you should be able to get more than your expenses in rent, even after giving the management company their 10% (or whatever it is in your area).

Second, the break-even point is based on the principal to interest split in your payment. That is a function of your loan term and how deep into the term you are.

sliverstorm3• 12 years ago

I don't think people necessarily see that as a perfect solution in which they make a profit. If you can come close to breaking even by renting it out, that gives you more runway with which to sell the place. Reduces the time pressure, so to speak.

gnoway• 12 years ago

In at least one US State, your property taxes are different if you're living in the home vs. renting it out. In my case, losing the homeowner's exemption would almost double my property taxes.

I'm not sure if you get to deduct property taxes for non-homestead property on your federal return either. In my case, losing this deduction would force me to use the standard deduction instead of itemizing. So, a possible double-whammy.

edit: note this is for the US.

analog31• 12 years ago

In general, the model doesn't include risk.

mattm• 12 years ago

To add to this, people don't usually lose their jobs in a bubble. If you are losing your job, chances are a lot of other people in your area are also losing their jobs which makes it even harder to sell.

aet2• 12 years ago

I think the NYT has redone this interactive piece like 50 times now.

mbostock10• 12 years ago

Surely you jest! The previous version was four years ago (in 2010) and was implemented in Flash. Screenshot:

https://twitter.com/driven_by_data/status/469498632027537408

aet2• 12 years ago

My bad

polskibus• 12 years ago

Congrats for a article on the NYT! I can't see whether D3 is used or not - can you shed some light on what did you use?

caseyf7• 12 years ago

I'm looking forward to seeing more flash replaced with d3!

al_gore• 12 years ago

There is nowhere that I particularly want to live that I could possibly afford to buy in, though.

sliverstorm3• 12 years ago

Broaden your horizons, perhaps? Manhattan & downtown San Francisco are not the only interesting places in the world.

TillE• 12 years ago

If one of your major criteria is a walkable city (ie, no car required) within the US, that list is very short and very expensive.

Leaving the country broadens your options considerably, but that also adds its own complications.

mcarvin• 12 years ago

For full disclosure I am a founder of the company but many of the mistakes in math / modeling made in the NYT Tool are corrected at SmartAsset. One example is the tax consequence of ownership - which because of the standard deduction is overestimated for lower value homes (<$250,000).

steven777400• 12 years ago

I just wanted to reaffirm what you're saying about the deduction on lower value homes. When we bought, people were telling us "you get to deduct the interest, it will be a huge impact!"

Well, these days thankfully, interest rates are relatively low. We paid a little under $200K for our home, and combined with the married standard deduction, the interest at first barely even pushed us into the itemize category. By next year, it won't suffice to even do that and we'll be back to the standard deduction.

The people who were telling us about how great the deduction is were people who all had the means to purchase much more expensive homes, and many of them bought in the past when interest rates were higher and the standard deduction lower. So it was true for them, and continues to be true for certain segments, but is not universally true.

ratscabies• 12 years ago

I was only able to itemize for the first 5 years. After that, standard deduction ever since.

thedufer• 12 years ago

It varies widely based on where you live, too. For example, in NYC state/local taxes are high (these are deductible on your federal return) so anyone with a reasonably high income is already beating the standard deduction, making the interest deduction a very large advantage.

marknutter2• 12 years ago

If you buy, you can do whatever the heck you want to with the house or your yard. That's true freedom and to some people - myself included - worth every penny.

dgabriel• 12 years ago

Not true in many, many cases. HOAs, condo boards, zoning laws, and historical societies can control homeowners pretty well.

Frozenlock3• 12 years ago

And you still need to pay taxes (rent) to your municipality (landlord).

So if I summarize, you can't do what you want with it and you need to pay your landlord.

Why are people calling this 'owning' a house?

segmondy• 12 years ago

So don't buy where there's HOA, Condo Boards or Historical Districts. That leaves you with a lot of options.

hkmurakami3• 12 years ago

I remember reading about one Arizona neighborhood which had restrictions on having a desert style front yard landscape and had an implicit mandate on having a front lawn and a specific kind of front door. The implicitness was the difficulty in getting a fair refinancing deal from the bank, and a devaluation of the home for not being in sync with the neighborhood's uniform appearance.

Dystopian• 12 years ago

THIS.

One of my co-workers bought a condo recently and remodelled the interior. Got a great gas grill island - with it, he needed an exhaust fan above.

During the reno he got handshake approval from the board president, and ended up having a really inconspicuous grate installed above one of his windows. Long-story-short, a board member complained, they voted, and he ended up paying $5K to have it removed, and now has an exhaust fan inside that isn't hooked up to anything.

If you're going to buy, make sure you check out all this kind of stuff before-hand (especially with condos).

sbov• 12 years ago

Yeah, this. I recently moved to the Los Angeles area. Even many houses have HOAs. One of the HOAs we looked at had the rule that your garage door was not allowed to be open unless your car was entering or exiting the garage.

Ultimately we found a place without one. But all newer construction (1990 or later) we looked at had an HOA.

marknutter2• 12 years ago

I spent 30 years of my life living in a Townhouse with an HOA, so I understand the restrictions they can apply. I now own a single family home and trust me, freedom is a relative term - I'm drunk with the notion I can do nearly anything I want to do to or around my house within the limit of the law.

pc862• 12 years ago

Well, usually. You can still be subject to HOA restrictions if you agree to them by buying a house in a HOA. You'll also be subject to township/borough restrictions which you can't really opt out of short of excluding entire neighborhoods from your home search (and researching local ordinances beforehand).

tekalon• 12 years ago

I hate HOAs and would deliberately avoid neighborhoods with HOAs or other types of restrictions.

tolmasky4• 12 years ago

If you rent, you can leave whenever the heck you want and then go live wherever the heck you want. That's true freedom and to some people - myself included - worth every penny.

Its really interesting the different things people value. I value not fundamentally worrying if there were to be an earthquake and this place would be destroyed. I value one day waking up and deciding, hey, I think I want to go try living in Portland, or just a different neighborhood here. I value not worrying about housing prices. This is just me of course, I totally accept that the other side of the equation has perfectly valid points.

larrys5• 12 years ago

"If you rent, you can leave whenever the heck you want and then go live wherever the heck you want. "

You can do that when you own as well. You have to sell your house. After all you can't just get out of a lease whenever you want it goes according to a fixed time period. You have constraints as far as lease renewal, term and things like that. If you own you can decide at any point to sell (although certain times of the year are better obviously).

"I value not fundamentally worrying if there were to be an earthquake and this place would be destroyed. I"

Well first that is only a concern seriously in certain areas and second I wouldn't call that exactly something that is a common occurrence either. It's like saying "if I rent (edit fix) I don't have to worry about rebuilding if there is a fire".

"hey, I think I want to go try living in Portland, or just a different neighborhood here."

Ok so I understand your point now (but will leave the above comments for discussion). You actually are looking more to experience different things and not get tied down. Similar to the fact that some people would rather go to a different vacation spot each year rather than own a vacation home in the same place.

In that case an argument can be made that it makes sense to actually pay more to rent than to own because you are deriving some other benefit from not owning that is actually worth more (maybe that is what you are saying..)

gibybo• 12 years ago

From what I've seen, you generally need a 12-24 month lease to rent a house. I can sell my house whenever I want (or leave and rent it out to someone else), but if I'm stuck in a 24 month lease I'm stuck for the next 2 years.

anywherenotes• 12 years ago

I have a house on a corner. Can't put up a fence because it would block drivers from seeing around the corner.

At least that's what contractor told me when I tried getting an estimate.

pnut• 12 years ago

So plant bushes or bamboo!

base698• 12 years ago

Except: take an extended vacation between employment, move to a hotter job market on a whim, move again on a whim, shield yourself to economic downturns.

Disclaimer: own a house in a place people rent, so I got out of that steaming pile of poo unscathed.

hashberry2• 12 years ago

Two important adjustments when using this:

"Investment return rate" -- Only 4%? An index fund will return higher than that.

"Monthly common fees" -- Required if you are considering buying a condo. This changes the per month rent comparison dollar-for-dollar.

pessimizer4• 12 years ago

Get ready for lousy stock returns

http://money.cnn.com/2014/05/21/investing/stock-returns-low-...

"The Shiller price to earnings ratio was designed by Nobel Prize winning economist Robert Shiller to give investors a sense of whether stocks are cheap or expensive. It compares stock prices, as measured by the S&P 500 index, with inflation-adjusted corporate earnings over the past 10 years.

"The magic number at the moment is 25. That's the current Shiller ratio, and it indicates that stocks are on the expensive side. The long-term average, going back more than 130 years, is 16.5.

"But the current level is significant for another reason. According to research by Credit Suisse, when the ratio has been between 25 and 26 in the past, stock returns over the next five years have been just 2.7%. That's after adjusting for inflation."

hashberry2• 12 years ago

In the short-term, perhaps. Returns long-term are high than 3%-4%.

nilkn2• 12 years ago

Only 4%? An index fund will return higher than that.

Just like homes will always go up?

refurb6• 12 years ago

That's what makes me laugh when I talk to people who are looking to buy a home. Despite the housing crash of 2007, when I ask them what would happen if housing prices go down, they get this disturbed look on their faces and say "nah! not in this city!!".

mrgordon• 12 years ago

No one said that index funds always go up but they do return more than 4% (nominal) as a long term average. I bet that the calculator uses 4% as the default because they assume a relatively conservative portfolio such as 50% bonds & 50% stocks. That portfolio may be appropriate for many people, but it is substantially less risky than tying up your entire net worth (plus more?) in a single house.

alexeisadeski32• 12 years ago

2% would be more accurate...

mbostock10• 12 years ago

Author here. Thought I’d highlight my favorite, perhaps non-obvious feature: the slope of the charts tells you whether the variable is positively or negatively correlated with the cost of buying. And depending on the settings, that slope can change from positive to negative.

For example with the defaults, the down payment chart is flat. This means the total cost of buying is relatively unaffected by the size of your mortgage. Felix Salmon pointed out this demonstrates the Modigliani–Miller theorem:

http://en.wikipedia.org/wiki/Modigliani–Miller_theorem

Of course, there’s still a big intangible difference between having debt and not having debt, like your ability to respond to market or income changes. And in an inefficient market, loans can be more or less expensive.

Playing with the variables and seeing slopes change from positive to negative or vice versa is interesting, too, because these suggest different optimal decisions. Like as your investment return rate goes up, the down payment slope becomes increasingly positive — meaning when stocks are doing well (and assuming mortgage rates aren’t also going up), it’s better to have a smaller down payment and put more money into investments. To a lesser degree, your marginal tax rate changes the slope of the down payment as well, by discounting the mortgage interest payments.

The magnitude of the slope also gives a sense of your risk: you can see how sensitive the equivalent rent estimate is to small changes.

krschultz• 12 years ago

This is a really awesome tool, and as someone in NYC currently debating renting vs buying it is very useful. I used to pass around the old NYTimes Rent V Buyer calculator often when people started thinking about the topic, I definitely will send this one out instead.

NoMoreNicksLeft3• 12 years ago

Of course, there’s still a big intangible difference between having debt and not having debt,

Both renters and owners need a place to live in the future, assuming they're not dead. If we exclude those who live with mommy and daddy or mooch off of other people...

Well, then whether the debt is formal with a mortgage or not makes little difference. Even renters are on the hook to come up with $1000 for the month of October 2016. It's just not in writing.

fspeech2• 12 years ago

The main problem with owning is illiquidity and associated immobility. If you rent you can quickly down shift if you run into trouble. If you own the transaction cost is much higher if you need to move.

The main advantage of owning one's own residence is tax and stability (the flip side of the illiquidity problem). Owner's equivalent rent is not a taxable income. Capital appreciation works in your favor rather than against you when you rent.

In short owning one's own home is both economically and psychologically rewarding if you have long term stable income.

lnanek23• 12 years ago

I've never seen a landlord go after a tenant for breaking a lease, honestly. The few I've talked to generally say they are beyond happy if the tenant is just out, and indeed, that's exactly what they say in eviction courts. They say they don't care about trying to get money out of the poor person being evicted, but that they just want the unit available to rent to someone who can pay. I think any landlord would be happier with a tenant breaking lease than doing AirBnb, for example.

dmnd• 12 years ago

I've been using the old version of this for a few months. Making it obvious to which parameters the result is most sensitive is a huge improvement, thank you and well done!

mbostock10• 12 years ago

Thanks, that’s good to hear. There’s always a risk releasing a new version of a popular tool. For those that still want to use the old one I think we’ll find a new home for it, too.

hkmurakami3• 12 years ago

Huge props for including things like the Marginal Tax rate for tax deduction and closing costs, which most of my peers that I've spoken to are unaware of or fail to take into consideration properly. I just recently had a conversation with a friend about renting vs buying, and I raced through many of the factors in this calculator to demonstrate that it's not such a simple question and that there are many factors that depend on one's financial (and other) situation, but it totally went over her head bc I was going way too fast. I'll definitely use this page when explaining things to my friends in the future. Thanks so much :)

mahyarm• 12 years ago

Wow, the marginal tax rate pretty much cut the rental limit in half, the difference is that big.

kenrikm2• 12 years ago

I used it to calculate if buying my house was a better deal than renting. Turns out over 30 years it was exactly the same.. down to the dollar.

jliptzin• 12 years ago

Really valuable stuff here. Thanks.

One small addition I'd consider adding is estimated rental income if you buy and plan to rent out a portion of the property. I am in the process of buying a home right now and plan to do just that, but this factor seems to be missing from the chart.

mbostock10• 12 years ago

Thanks, that’s a good suggestion. There are additional tax considerations with second homes (and business properties), but it’d be nice to include these in the model.

arjunnarayan2• 12 years ago

Do you have a link to Felix Salmon pointing out that this demonstrates Modigliani-Miller?

Edit: Thanks!

mbostock10• 12 years ago

https://twitter.com/felixsalmon/status/469311904582627329

kpommerenke• 12 years ago

According to the Modigliani–Miller theorem, the mix of debt (size of mortgage) and equity (down payment) is only irrelevant in a world without taxes. However, mortgage interest is tax deductible, while rent is not, so their result doesn't apply here.

The flat down payment chart is a coincidence, based on the default values for interest and inflation rates, growth rates and expected returns.

mbostock10• 12 years ago

I don’t think it’s a coincidence — those default values reflect the current market, and it’s a reflection of the market being fairly efficient. For example, if investment return rates were consistently higher, you could expect mortgage rates to rise as well. Taxes introduce some inefficiency, but I think the broader point still holds.

pessimizer4• 12 years ago

Your mentioning of this made me check out the graphs again - and I noticed that the graph depicting the size of a down payment was flat. That could only mean one thing: the cost of mortgage insurance (that you will be forced to get if your down payment is lower than 20%) hasn't been included. That's a major cost on low down-payment house purchases.

Intentional or oversight?

https://en.wikipedia.org/wiki/Mortgage_insurance

mbostock10• 12 years ago

We’re not currently including mortgage insurance, no. You could approximate it by increasing the mortgage rate, but the tax treatment of mortgage insurance payments may be different and so that may not be accurate. Perhaps this is something we can add in the next iteration of the calculator.

The interaction between down payment rate and mortgage insurance rate also reveals a limitation of our user interface: On the one hand, it’s nice to have all the variables decoupled so that you can set and explore them independently. On the other hand, many of the variables are not independent. If you change one variable, you may need to change other variables to maintain a realistic scenario.

Having the mortgage insurance rate tightly coupled to the down payment would probably be too limiting, but maybe there’s a still a way to better identify when certain variables (or combination of variables) are unrealistic.

mncolinlee• 12 years ago

I never paid a penny of mortgage insurance. Let's be clear. Mortgage insurance does not protect you. It protects the bank that owns the mortgage.

You ONLY need mortgage insurance if you invest less than 20% down. Even then, you can often take a second, higher interest mortgage loan instead of paying for mortgage insurance.

A second mortgage is better for your tax return and equity and also offers better returns for the bank, which only sees a benefit from mortgage insurance if you default. Do you really want to give your bank any incentive to help you default?

The entire point of mortgage insurance is to protect the bank in the case you foreclose. It ensures the bank receives 20% of your property value so they can afford to take their time fixing and selling your house to its next owner. They don't need this risk mitigation if they have your downpayment.

woobar• 12 years ago

Why are Utilities listed under the category labeled as "surprising variety of expenses that renters do not directly pay"?

Edit: I see it is just a poor labeling, explanation mentions just the portion of utilities that not covered by landlord.

fspeech2• 12 years ago

One risk associated with owning that doesn't often get mentioned but that is more relevant these days is your exposure to misgovernance of your local governments. There were a few scares in the municipal bonds markets in recent years but home buyers should recognize that they are exposed to similar risks. After all it is the taxes they pay that will be needed to pay back the municipal debt. If a city were to get into fiscal troubles police and other public services would get cut first potentially impacting property values, maybe greatly in which case there could be a downward spiral.

Spooky232• 12 years ago

Unless you're somehow securing multi-year leases, that's a cost that is passing on to you as well.

You also need to factor in the value of negative impacts of renting. When you have kids, school selection is driven by location -- and a lease is more ephemeral than a mortgage. You also always need to deal with landlords, who can be good or bad, and often cannot make changes to the property that you would like.

dzohrob• 12 years ago

This is super-helpful, thanks for posting!

One quick suggestion: it would be great to be able to save the numbers you've punched in so you can share a URL with someone (e.g., spouse, parents) next time the rent v. buy discussion comes up.

silverlake• 12 years ago

Your home price maxes out at $3M. That's just a small apartment in Manhattan.

judk4• 12 years ago

Well, Central Park West maybe. You can get a nice small (Manhattan small -- a near-minimal studio) apartment for about $0.5M

philfreo• 12 years ago

Very well done!

I noticed that one of the biggest factors, unsurprisingly, is Home Price Growth Rate and rent price growth rates. Do you have any sources for the rates historically? Preferably by location.

RobinL• 12 years ago

Great visualisation and nice to see it properly accounts for all considations.

I live in London. Unfortunately, as the calculator shows, change in house prices is overwhelmingly the most important consideration in buying if you're thinking of staying for much more than 2-3 years. Admittedly growth is completely unpredictable, (and also highly inequitable), but to a large extent a decision to buy is based on expected future house prices.

For instance, I have a friend who bought three years ago - a £250k flat which would cost around £1,300 to rent. According to Rightmove and Zoopla (and the price a similar flat next door sold for recently), the monthly gain in value has been around £3,000 (!!). I also note this gain is tax free, so equates to earning more like £5,000 a month pre tax.

Unfortunately these gains are only available to those who earn enough and save enough for a deposit, or more commonly, those who receive parental assistance in purchasing property.

eloisant• 12 years ago

How do you take into account the initial fees? (Taxes, real estate agent fees). It would be nice to have that configurable.

It's important to have it separate from the price you pay to the owner because you shouldn't include them in the resell value of the house.

toyg• 12 years ago

Great work! Any chance that you could publish a tax-neutral version, which could be used internationally?

DrPhish2• 12 years ago

Suggestion: When the down-payment slider goes over 50% suggest that, depending on income level and interest rates, it may make sense to buy the house on a line of credit _backed by the house itself_. I did this, and it saved me a ludicrous amount of money vs. a mortgage

sbd• 12 years ago

How are you then able to get a mortgage if the house is already collateral on another loan?

pilom2• 12 years ago

The format of the old version [1] is so much better. The independent variable is how long I need to live in my house to break even, not how cheap do I need to find a place to rent.

[1] http://www.nytimes.com/interactive/business/buy-rent-calcula...

smrtinsert2• 12 years ago

This actually was more helpful, thank you.

mbostock10• 12 years ago

If you all you care about is being cheaper than a given rent $X, then just look at the How Long Do You Plan to Stay? chart. When the equivalent rent drops below $X, then you’ve “broken even”.

(That’s in terms of buying being cheaper than renting; if you meant making an actual profit on your home, then the equivalent rent has to drop below $0. This typically only happens when the home price growth rate is high.)

But how long you stay is far from the only independent variable. The intent of the new calculator is not just to provide a single, definitive answer — which is essentially impossible given the fundamental uncertainty in predicting the future — but to demonstrate how the variables interact with each other and give you a feel for the space of possibilities. There are many other considerations besides timing.

geebee• 12 years ago

I found this fascinating, and fun to play with. My own academic background is in industrial engineering, and a big part of my career has been creating analytical tools (as software) for planners. So this sort of thing is right up my alley.

Here's the problem I often run into - how valuable is this, really, compared to a good and much simpler heuristic. For instance - how well would this compare to a rule of "buy if you plan to be in the house more than [five/seven/ten] years?" One story they like to tell in operations research classes is about a couple of programmers discussing the implications of rounding when an input (viscosity) had been estimated by a field worker rubbing mud between his fingers and typing something in...

Another factor is that, in my "adult" life (adult being where I made enough money to squeak into the housing market if I so chose), housing has fluctuated wildly. I finished grad school in about 2000. Since then, housing has made a mocker of pretty much every financial decision I've made. The amount I saved was generally eclipsed by the amount San Francisco housing values increased between 2000 and 2007, dropped between 2007 and 2012, rocketed up again since then.

In spite of all that, I think that this is a very worthy tool, especially if it helps people really understand the factors that go into a decision. But considering how unpredictable everything is... do you think it really adds much as a true planning tool, beyond a vastly simpler heuristic?

Tycho2• 12 years ago

zappo had a list of uk cities comparing rent prices with interest only mortgage price. Some cities eg. Edinburgh showed hardly any difference (for comparable sized properties).

What I'm not sure about though is how it compares to a traditional principal and interest mortgage. Obviously your interest payments fall as the mortgage amortises... So then how does total interest compare to money spent on rent in that case? That's what most people would be wondering when it comes to evaluating renting vs buying...

mbostock10• 12 years ago

Interest payments are only part of the story. The equivalent rent we calculate provides a much more direct comparison.

colinramsay• 12 years ago

I think you might mean Zoopla?

http://www.zoopla.co.uk/press/releases/buying-beats-renting-...

Tycho2• 12 years ago

Er... Yes.

wkd415• 12 years ago

Would love to see this for lease or buying cars...

jonmb• 12 years ago

Leasing is almost always more expensive, but there are some benefits. This page explained it well: http://www.edmunds.com/car-buying/compare-the-costs-buying-v...

frenchman_in_ny• 12 years ago

The NYTimes did do it, it's just not as slick as the housing rent vs. buy calculator.

http://www.nytimes.com/2013/09/21/your-money/car-leases-grow...

http://www.nytimes.com/interactive/2013/09/21/your-money/To-...

yen223• 12 years ago

In theory, leasing should be much better, since cars don't appreciate in value, negating one of the advantages of owning. In practice, lease prices are so high that it seldom makes sense to lease.

bane14• 12 years ago

Buy a reliable cheap car that's easy and cheap to maintain and repair. Pay it off as quickly as possible and run it for 10+ years. Your operating cost per mile over a vehicle lifetime like that gets measured in fractions of a dollar per mile.

My almost 13 year old car costs me something like <$.30/mile right now and getting cheaper the older it gets. So far, I've never had a repair that cost more than $300 and gas mileage is comparable to some hybrids. It cost me $12k new and I paid it off in 2 years so my actual purchase cost was something a bit higher, but I didn't let the financer recoup even half of their expected interest off of me.

refurb6• 12 years ago

The calculator is surprisingly accurate based on some math I did late last year when thinking about buying a house.

A small (1300 sq ft) house in SF can be bought for $750K in some neighborhoods in the south of the city. The ones in between the fancy ones and the crappy ones.

I did a pretty detailed analysis of what everything would cost. Loss of investment income on the down payment, insurance, property taxes, etc. And came out to around $4100.

You can rent the same house in SF for around $3750/month, so unless you're assuming a pretty spectacular rise in home values, it doesn't make sense to purchase.

greedo• 12 years ago

I might be missing something, but if house prices rise just 1% annually, your differential would shrink dramatically in favor of ownership.

veemjeem• 12 years ago

So I live in rent controlled area in the bay area where I pay around $1500 for a 2 bedroom. Using this calculator, it seems like buying almost any kind of home in the bay area would be a very bad decision.

refurb6• 12 years ago

In the scenario I modeled, I was assuming around ~3% growth.

Rent control definitely favors renting in a lot of situations. If you were at the whim of your landlord, then I could see buying being more attractive, especially in a market where housing prices are going up.

The real kicker about owning a house is that housing prices never go up a nice steady 2% or 3% per year. They go up 5% one year, then down 5% the next. If you don't have control over when you sell (loss of a job, etc), that can really hammer you.

bane14• 12 years ago

Rents tend to increase in normal markets at about the rate of inflation, in crazy NYC/SV markets they increase faster while mortgages will stay the same (or can be reduced or offset). In the long run, $4100/mo in 2014 dollars will still be $4100/mo in 2014 dollars 29 years later. Meaning they'll be a fraction of of 2043 dollars via inflation. The mortgage then de facto goes down while rent will continue to increase at least with inflation (or at least it does historically).

snarfy• 12 years ago

When interest rates are low, prices are high, and when rates are high, prices are low. It's fairly straight-forward. Your payment works out about the same. You should buy when rates are high and prices are low because you can renegotiate the rate later. You can't renegotiate the price.

Rates are still pretty low now, and thus I continue to rent.

b_emery• 12 years ago

When interest rates are low, prices are high, and when rates are high, prices are low.

The data says otherwise: "“There’s no strong correlation between interest rates and home prices,” ... The bottom line is other factors (like a stronger economy) have a bigger impact on house prices than changes in mortgage rates." [1]

[1] http://www.calculatedriskblog.com/2013/06/house-prices-and-m...

gutnor• 12 years ago

Well it depends how good the rental rate is or how much good your investments are or how different is the increase in rental rate vs house value ...

That's where the calculator is useful.

imjk• 12 years ago

Makes sense on the surface, but historically this hasn't been true.

iamthepieman• 12 years ago

I resisted buying for a long time for mostly flexibility reasons. Eventually, with a 2.85% 15 year rate and a roughly 2.5% home price growth rate it was just stupid not to buy.

This is a great tool. I would have to find a rental for nearly half (60%) the going rate in order for renting to make sense in my area.

millstone3• 12 years ago

My wife and I found a great apartment to rent. It was spacious, quiet location, reasonable rent. We were happy for a few years.

Then the owners sold the complex, and the new owners set out to remodel everything, very much against our wishes. Construction crews started entering our apartment. They came in while we were out, laying down plastic sheets and moving our furniture around. They sometimes came in while I was sleeping, and while I was getting dressed. It was humiliating: I felt stripped of my privacy and dignity.

Buying allows you to control your property, but more significant to me is what renters must endure: arbitrary changes to their home, allowing unfamiliar men to enter their homes uninvited, etc. As a homeowner, nobody enters my home uninvited, unless they have a search warrant!

up_and_up• 12 years ago

but renters must submit to arbitrary changes, allow men to enter their homes uninvited

Before buying our home, my wife and I rented and had a horrible time with our property manager.

The climax was coming home on a chilly friday night in November with NO WINDOWS in our bedroom and nice little note stating: "Be back on Monday".

The painters were supposed to paint the trim and windows and decided take them out to paint them but not to replace them for the entire weekend.

Buying allows you to control your property

Amen

blub• 12 years ago

Which country was this in? I find it incredible...is it everywhere like this?

gsnedders• 12 years ago

Certainly in most (all) of Europe (even in places with relatively weak, by European standards, tenancy agreements like the UK!) nobody except the tenant can enter the property unless advance notice is given or in case of emergency (e.g., if a pipe bursts, the landlord is entitled to repair it without having to give advance notice).

monknomo• 12 years ago

If you are in the states and are not in a place with an extremely well established rental market run by professional landlords, it is probably like that.

Of course, most places require that landlords give the tenant some amount of notice before entering the home (generally a day or so), but taping a notice to the renter's door that said "remodeling starts tomorrow and will last a month" would probably cover that.

Some states have renter's law that says something like "if your rental is unusable because of construction or damage or what have you" that you can seek "equivalent premises at the market rate" and bill your landlord, but I suspect if you do that you'd better start shopping for a new place to live and limbering up your small claims court documentation.

//edit

The bottom line in the states is that you probably have decent rental protection but will have to sue the guy you are buying a roof from if they don't voluntarily play nice.

millstone3• 12 years ago

This was in the USA, where the law states that landlords and their hired contractors may enter during "reasonable hours" for "improvements."

Probably rendering the apartment inhabitable for hours every day is not legal, and I could have sued for some compensation, but living there had gotten so miserable with the construction noise and random water shutoffs that I just wanted out.

distracteddev902• 12 years ago

I am a renter as well but we have pretty strict rental agreement regarding these kinds of things. The owner is not even allowed to enter the property without my prior permission or a certain amount of notice.

When you are paying for someone else's house, please do not be afraid to protect yourself with a proper, binding rental-agreement/contract.

Edit: I live in Canada incase that makes a difference.

renaudg• 12 years ago

This is insane and would be illegal in most European countries, AFAIK.

YokoZar• 12 years ago

It probably wasn't legal in the US either. The remedy, however, is threatening legal action and withholding rent.

jvm• 12 years ago

Is the argument here that there is never inconvenience or downside to home ownership? That sounds rather naïve and one-sided. The flip side of all this is that as an owner, any sort of problem is YOUR problem. And there are a lot of potential problems with a building.

millstone3• 12 years ago

Absolutely, owning a home is more work. However, IME it is less inconvenient, because we are able to better control the timing of that work. For example, when our roof leaked one night, we were able to get it fixed the very next day. When we needed electrical work done, we scheduled it for when we would be gone, so as not to disrupt our lives.

There's a valid point that we had to pay for these out of pocket, instead of a landlord paying. In return for these random financial hits, we get a predictable mortgage and an increased property value, which sure beats the yearly rent increases [1].

[1] CA's horrible Prop 13 limits our property tax increase to 2% a year.

lnanek23• 12 years ago

Kind of prefer that landlords take care of all that, personally. As a renter, if something is broken I'm calling the landlord and going to work. Sure ain't my job. Couldn't really care less if someone else is inside.

sampo• 12 years ago

They sometimes came in while I was sleeping, and while I was getting dressed.

Your country (which country is it?) seems to have very substandard legislation in these matters, if such intruding is not illegal.

vishnugupta• 12 years ago

This is why I was forced to buy a home, in India. Two months into new rental place the landlord casually said he's going to sell the place and that I will have to abide by whatever the new owner says, worst case being vacate the place with 2 months notice that had taken us a good one month to find and settle into.

BTW, this isn't an isolated incidence. If you are renting a house in India, you will most like be subjected to the vagaries of land lord.

In the end it all turned out to be good. Now I own my house, decent mortgage and I get tax benefit as well. The net outflow (considering savings on rent and tax benefits) is very much manageable.

In India, if you can afford it, then the decision is fairly straightforward. Buy!

lazyant• 12 years ago

We need one like this but Canada; no tax breaks on mortgage interests or property taxes up here :-(

refurb6• 12 years ago

Canada also doesn't have 30-year mortgage terms. The loans are still amortized over 30 years, but you need to renew the mortgage every 5 years or so.

If you lock in a super low interest rate, you only lock it in for 5 years (10 years are available as well, but you pay a premium in terms of interest rate).

rahimnathwani• 12 years ago

This sounds similar to the mortgage market in the UK. Longer term fixed rates exist but the rate reflects the yield curve over the fixed period (not just current spot rates) and there is usually a large redemption penalty. For example, if you sign up for a 4-year fixed rate deal, there might be a redemption penalty of 4% if you close it out in year 1, 3% in year 2 etc.

Shivetya• 12 years ago

I will tell you my reason to own a home, large at that, even though I am single. I have seen friends/coworkers have to move after leases were not renewed. I have seen friends/coworkers lose put up with stuff about their rentals I would not tolerate as an owner. Sure it go fixed, but damn. I have also seen them held hostage to rising rents just to renew.

Yeah it can be more expensive at times, more work definitely, but I never have to worry about someone else deciding they don't want me living here.

jakebellacera2• 12 years ago

Absolutely. I guess lots of people, myself included, choose renting over buying for the main reason that they might find themselves not living in their current location in a couple of years. For me at least, that is the price to pay for the freedom of where I live. I know that once I find a place to settle down I will consider buying, but until then I will rent.

gfodor2• 12 years ago

The problem with this (admittedly very good) calculator is there are two key knobs that require massive amounts of speculation but have a huge impact on the decision: projected return on investment and expected home price growth. Good luck predicting either of these over the next 10 years.

sarah2079• 12 years ago

I wouldn't say this is a problem with a calculator. These two factors make predicting whether renting or buying will be better really hard in some cases, and the page makes that clear. I see it as an interactive tool that helps you explore all the variables involved rather than a calculator designed spit out a clear yes or no answer in every case.

sgustard• 12 years ago

Same with retirement calculators. Step 1, at what age do you plan to die?

jbarham2• 12 years ago

This calculator ignores the fact that the market for real estate buyers is increasingly global but the rental market is local.

If you are in your 20's and grew up in a middle class family in Vancouver, Toronto, Sydney, Melbourne or Auckland, and have a middle class job, it is virtually impossible for you to be able to afford to buy a house in the city in which you grew up. E.g., here's a New Yorker article on the impact of the global property market in Vancouver: http://www.newyorker.com/talk/financial/2014/05/26/140526ta_....

The political fallout from the intergenerational inequality over property ownership in Canada, Australia and NZ is going to be very interesting to watch...

usaar3333• 12 years ago

This calculator ignores the fact that the market for real estate buyers is increasingly global but the rental market is local.

How is the calculator ignoring this fact? If you think that increasing globalness will cause home price growth to be higher than inflation/rent growth, you can modify that parameter.

jbarham2• 12 years ago

My point is that for young people who grew up in cities like London or Vancouver, the choice is not buy or rent, the choice is rent or move away from the city they grew up in if they want to be able to buy a house on a middle class salary.

blue11• 12 years ago

Buying a home is not an investment, it's a quality of life improvement. Something that I usually don't see mentioned in rent-vs-buy arguments is that the housing stock that's available for sale can be very different from what's available on the rental market. The two markets are similar only at the low end. If you want something nicer, the chance that you are going to find exactly what you want is very slim. Even "luxury" apartments for example typically have beige carpet, cheap appliances, cheap bathroom fixtures, etc. For a private landlord it doesn't make sense to upgrade the property above the bare minimum either. It's just not cost effective. And if you are looking to rent a single family house your choice will be even more limited. Now, if you buy your home, with some reasonably priced improvements you can improve your level of comfort significantly. Of course, not everybody cares about these things. If you don't care too much about where you live then renting makes perfect sense.

lnanek23• 12 years ago

Depends on what you consider quality of life. Mine mostly depends on short commute time and I don't really care about interior decor beyond there being WiFi, a shower, and a bed. End result is that renting is a much higher quality of life because you have more choice of where to rent and can rent the minimum travel distance to work.

adamkittelson• 12 years ago

I'd personally find this more useful if I could start with what I'm paying for rent and get a result of "If you can buy a similar home for less than $xxx,xxx then buying is better."

33W• 12 years ago

You can do this by setting all of the sliders except for the home price, then dialing it in until your rent is shown.

basdevries• 12 years ago

Tl;dr http://www.fastask.it/is-it-better-to-buy

alexeisadeski32• 12 years ago

This version is better:

http://www.nytimes.com/interactive/business/buy-rent-calcula...

re_todd• 12 years ago

My uncle bought his house and pays $300/month in a neighbourhood where rent is $1,500/month on a similar home. He is near the end of a 30-year loan, and will retire soon, paying just property taxes and upkeep. Keeping the long-term in mind, it seems better to buy.

bane14• 12 years ago

We're 7 years in on a home. Originally we had a 30 year mortgage, a couple of no cost refinances later we're on a 15 year mortgage with a <3% borrowing rate which is almost free money. We've been paying down the principle as well and our monthly mortgage is now about 50-60% of the comparable rents and dropping while rents in my area are rising at 5-6%/yr. We're on track with paying off the loan inside of 2 or 3 years after which we'll be living in a very nice home effectively for free. We're even thinking of doing some basement modifications and renting out the basement as a separate apartment (we never use the basement for anything the house is >5000 sq ft.) which will completely cover our mortgage while it's still required or will bring in income after the house is payed off. Every one of these scenarios would be impossible if we were renting, all of the money we would have payed in rent would have disappeared into smoke and we would have been helping somebody else make their mortgage payments or making them money.

And oh yeah, our downpayment on this house was covered with what we made in appreciation on our previous house, plus we payed off two cars with it.

We've already made some money on this house as well despite the housing crash. It's recovered the original value and is in the black now.

hagope• 12 years ago

Has anyone compared this to the Trulia buy versus rent calculator? http://www.trulia.com/rent_vs_buy/

kerneis• 12 years ago

Is this calculator very specific to the American market, or would it also produce accurate estimates for, e.g., France or the UK?

russgray• 12 years ago

I've just used it for the UK. I ignored the currency and just used exact numbers (so what I paid for my house in £ is the number I put into the site as $). Under taxes, I adjusted property tax until the dollar amount was roughly equivalent to my annual council tax, and adjusted the deductible to 0. Under closing costs, I included stamp duty as a buying cost. Insurance, maintenance, etc are all direct conversions.

Leaving most of the expected growth sliders in place, and taking into account that I've shortened my mortgage with additional payments, it estimated I'd only be better renting if I could get an equivalent property for about £565. In reality, the smaller house a few doors up rents for about £1500, and Zoopla estimates the rental value of my house at £1600. So, either I live in a really good buying area, or the US calculations don't translate well.

bane14• 12 years ago

Doesn't have the fancy d3 visualization, but here's a better analysis over the long run (30 years). It even stacks the deck against owning at the start by assuming 100% financing. There's a few missing components (mortgage insurance etc.) but even if you add those numbers into this rather detailed analysis, the conclusion doesn't change. It's actually a good enough analysis that you can just added or subtract a few other scenarios from it yourself and until you're describing some very bizarre circumstances, the basic conclusion holds. All the calculations and reasoning are provided here. Buying is unambiguously a better use of your money over the long term. It's not even close.

http://assayviaessay.blogspot.com/2014/04/rent-or-buy.html

Lots of people here describe renting as having an upside because you can remain location mobile, but that's true of owning as well. The only option at that point isn't to sell your home and then buy one somewhere else, you can also rent out your current home, and buy a second one. You can continue doing that ad nauseum, except now you've convinced other people to pay for your mortgage instead of you. In the end you'll own a few properties and all the people who rented from you will own nothing.

Something mentioned in my link but not explicitly in the OP, rent goes up, mortgage payments stay the same or can go down. Over 30 years, your housing burden goes down significantly providing you with increased monthly liquidity.

At the end of the day, you own the property at the end and for all years >30 you effectively live for "free" (minus taxes).

I urge everybody reading the OP to take a few spare hours and run the numbers themselves and see if the easy conclusion here holds out for them.

techsupporter• 12 years ago

That only works if a few things are true, primarily that you can rent your properties for more than their carrying costs. If you bought and then the bottom drops out--which, potentially, causes you to need to move for work so you have to sell low--then this isn't as feasible. Second, you also take on the risk of being a landlord, so you're now responsible for the maintenance and upkeep on two or more properties and you get the cost of vacancies.

True that your housing costs will eventually drop to near-zero (upkeep and property taxes always exist), but renting out your place won't always help you with that. Besides, more and more people are winding up in blasted Homeowners' Associations with deed restrictions that prevent renting entirely or more than a certain, small, percentage of rentals.

Ultimately, as you said, the decision is an individual one, but the conclusion is usually far from easy.

(Even more bonus fun: Try accidentally being the landlord of someone who decides to cook meth in one of your rentals. Does your investment risk profile consider this? Remember that rentals are, fundamentally, investments, unlike your primary residence which is, first and foremost, your shelter.)

bane14• 12 years ago

Rent will almost always go up. If I rented my house the moment I bought it, I would be running a nice deficit and have nowhere to live. Today I can rent it out and the market rate will make me enough money I can then go rent a 2 bed room apartment and still have a surplus. This is because my mortgage costs either stay the same or drop...in dollars priced at the year I borrowed the money originally. While the rental rate increases have matched or exceeded inflation every year since then.

If I bought a home in my neighborhood and rented it out tomorrow, I'd take a hit on it for maybe 4 or 5 years, about $100-200/mo. But trends show I'd match my outlays after that and within 10 years have made all my losses back plus a monthly profit plus whatever property appreciation the market has decided to give me.

TBH, being a landlord is a huge PIA for the reasons you hint at, which is why lots of people don't do it, but financially it can make easy sense if you can stomach a few years of losses till rents rise enough to exceed your outlay. Ideally you'd rent at market rates, when your mortgage and other expenses were far below market rate. That's the situation I'm in now, my monthly expenses are about 50-60% of the market rate rental price for a house like the one I live in. My wife and I have already decided that when we move, we're just going to rent this property out and use it to make money. Even with the overhead of a property management company, we'll come out in the black every month. If we stay here, we're on track to pay off the entire mortgage in 2-3 years anyway and then we'll be living for close to free (minus HOA and property taxes). We could both live comfortably on part time jobs at Target at that point.

One of the problems I see in many of the Rent vs Buy comparisons is that people who favor renting seem to think landlords are a charity of some kind who magically make all the extra costs of owning a property disappear. But nobody is in the landlord business to lose money like this, as much as the market will bear, your goal as a landlord is to pass along as many possible costs to your renter as you can and not just rely on property value appreciation to dig you out of your financial hole in 20 years this includes, but is not limited to: HOA fees, utilities, taxes, appliances, repairs and maintenance, common area service, everything.

smrtinsert2• 12 years ago

I know a multiple property owners. Here's some of the few more common cases as to why people don't strike it rich immediately when renting out properties.

  1. abandonment, they just leave without paying
  2. they incessantly ask for features
  3. they hoard
  4. they ruin beyond the security deposit and then dont pay (pets etc)
  5. they consistently pay late
  6. long time unoccupied eats away at profit due to special assessments, condo fees, hoa fees, whatever costs there are in the community
  7. natural disasters (california/florida yikes)
  8. simple non-payment.  try renting in a renter protected area like dc (here's a hint, dont).

It's not the road to riches that you hear whispered occasionally. The people who actually seem to make a profit from it are tied to housing in some way - either realtors or contractors/property managers and this is because they get the non-public deals and fix houses themselves. But even they dont make that much income from until much later and you can be sure they had to work long for it.

secondForty• 12 years ago

Really neat that you've updated this. One issue: The graphs of grey bars on white background have very little contrast even in different browsers on a nice monitor. The old version of the calculator has much more color contrast between the graphs and background and doesn't have this issue.

oldspiceman• 12 years ago

Rent or buy arguments universally skip what I consider the most important factor in any major investment decision: freedom. When you buy a house, you tie up major assets and take on a huge debt load. This provides a massive constraint on your life. You're less likely to take on a risky job opportunity, you're less likely to move for a good opportunity, you're less likely to purchase other things you enjoy, and you put all your eggs in one basket. On the last point, as Americans should know now, real estate is not a sure holder of value. You can easily lose 50-100K if you need to sell your house to move somewhere else but there are no buyers. The flipside of this is you may sell it for the asking price but need to wait a year to do so.

MrBuddyCasino• 12 years ago

Don't forget the human factor! Though theory says buying a house is not always the best financial move, on average those people are better of when they're old, because they are forced to live more frugal.

People that rent an apartment or house usually don't have the discipline to live as frugal as buyers are forced to be.

judk4• 12 years ago

This analysis always misses the most important by far for non-yuppies: the housing mix for renting vs owning is very different. In my neighborhood, you can't rent a house, because everything is owner occupied.

Rent vs Own is a boring question. Rent This vs Own That is nearly impossible to quantify.

pilom2• 12 years ago

The New York Times has had this same calculator for years with all the same options and a much better interface: http://www.nytimes.com/interactive/business/buy-rent-calcula...

Why did they make it worse?

scott_karana• 12 years ago

Worse according to who? I can see the appeal of the old version, but I found the new one more suitable to my needs in every way I can think of.

smackfu• 12 years ago

Another variable that would be useful is property-tax growth rate. Because sadly that seems to increase pretty constantly.

Is It Better to Rent or Buy?

Related Stories