Is it Better To Buy or Rent?

The New York Times has a nifty calculator that will help you decide if its better to rent or buy. It told us that based on our rent vs what it would cost to buy a place similar to the one we rent…buying was only better after 24 years. Sobering news. —MEGHANN MARCO


Is It Better To Buy or Rent?
[NYT]

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  1. Dr. Eirik says:

    Does that factor in the mortgage tax deduction you get when you buy? I don’t see it listed there. I always understood that was part of the savings of buying vs. renting.

  2. mantari says:

    For my location, every reasonable change I could do to the numbers puts it in the 2-6 year range for buying to break even with renting. I do wonder if it is calculating homeowner’s insurance vs renter’s insurance into the equasion or not.

    I think the higher the numbers (typical in east or west coast), the more accurate this chart is. But the on the lower numbers, it lacks accuracy. IMHO.

  3. JuliusJefferson says:

    You also have to remember that if you buy property and something breaks or needs replacing, you’re responsible to buy it (in most cases). This probably evens out the mortgage tax deduction, or at least part of it.

  4. tvh2k says:

    Check out the advanced settings under “General”, “Rent” or “Buy” (top-right)

  5. MercuryPDX says:

    @mantari: Check under the “Advanced Settings” top left…

    They allow you to tweak maint costs, utils, insurance, etc. to make it more accurate.

  6. kerry says:

    This doesn’t factor in asshole landlords who sell your building for condos and the cost of moving every year or two as a result. I would have happily stayed in my first apartment had it not been sold to a developer, and because of all the condo buyouts the only building I could afford was in a not-so-nice neighborhood where I ended up getting robbed at gunpoint on my own street. Buying was a way to avoid risking my home every year to developers and get out of the ghetto. It achieved both nicely, I couldn’t care less whether it might cost more in the long run.

  7. The_Truth says:

    so between 1-3 years for me!

    Nice, I guess it helped that the builder paid my closing costs and that my mortgage broker took no fees.

    Of course buying a home is not just a straight financial decision, a lot more things factor into it, such as quality of life, stability (Is it worth more to you than the extra cost of not having to worry about rent fluctuations?) etc

  8. Trai_Dep says:

    I’m cursed with a good rent deal, a block from the beach in a good neighborhood. Even if I bought a crack-den hovel under the airport for $300,000 (which would be a freaken steal), it will never make sense for me to buy. Ever.

    Damn. I’ll never be able to paint that Che Guevara mural on the living room wall.

  9. UnStatusTheQuo says:

    Regardless of how awesome anyone’s rent is, just remember– the landlord IS making money off of you, or you wouldn’t still be there.

  10. PDQ says:

    “Regardless of how awesome anyone’s rent is, just remember– the landlord IS making money off of you, or you wouldn’t still be there.”

    Ummmmm….the company that holds your house note is making money off you too or YOU wouldn’t still be there.

  11. cgmaetc says:

    Like I said before, here in LA, it’s better to buy if you can.

  12. diggtatorship says:

    Happy day for me! My wife and I are closing on our first house on the 30th.

    We’re fortunate enough to be in an area that was not heavily affected by the housing boom. It also helps that we’re already buying the house at 10% below the appraisal value. :)

    According to the calculator, using the most conservative numbers I could, we’re better off buying even at the one year mark. Since we plan to stay for about 4 years, we’re in good shape.

  13. FLConsumer says:

    @PDQ: The company which holds my house note is making far less than the money I’ve taken from that and invested, otherwise I wouldn’t have bothered taking out a home loan.

  14. Sandtiger says:

    I’m really glad to see this. For my location (and not including the tax benefit for owning a home) I’m already getting more benefit from buying the house 5 years ago. My rent vs. own break even point was a few months ago.

    Some of the benefits I’ve noticed lifestyle wise:
    No noisy/loud neighbors banging away on walls/ceiling at night
    I can modify/change anything in my place
    I have a completely networked house (wired, wireless, CATV, DirecTV, Sat Radio)

  15. lalawgirl says:

    How could you possibly create a tool like this and not figure in the tax savings?

  16. megsie says:

    The calculator does take into account the tax savings. As was stated before, see the “Advanced Settings” area in the top right.

    Yikes! Where I live rents have stayed pretty cheap while purchase prices have skyrocketed. Given the rate of appreciation that’s projected for our area it turns out I’m better off renting for the next 25 years!!

  17. LAGirl says:

    @lalawgirl:

    exactly! you can write off all mortage interest + property taxes. this can save you a lot of money on your tax return. you really need to factor this into your rent vs. buy decision.

  18. squikysquiken says:

    @lalawgirl:
    @LAGirl:

    Except they did factor that in. Check out the advanced settings on the right. You can set various rental and buying costs. They have buying and selling costs, all the mortgage parameters, maintenance, renovation costs, rental fees, condo fees, effective income tax rate (for the deductions), utilities, rate of return on investement, inflation. They even count capital gains exclusion (for those who hope to make millions off their houses).

    This is pretty impressively complete. Also check out the methodology link at the top right on how they account for all of those parameters.

  19. jgkelley says:

    I spent a majority of my day off time yesterday screwing around with this, and frankly, you have to read the accompanying article to make sense of it. It’s easy to say “Well, houses appreciate at 4%, so I’ll be fine in 5 years,” but if you read the article, you see that its very unlikely that your house will appreciate at that rate this year or the next. We are in a slump that is very unlikely to end in the next 48 months, per the experts. So drop your “appreciation meter” to 2% to be realistic and see that whether or not it would be foolish to buy – that’s the point of the tool.

  20. RokMartian says:

    Mine was only a year, even with a 2% appreciation and 5% down payment. I think that a lot of people may not be comparing the equivalence in what they would buy vs. the rental. If I rent a 4 bedroom house with a 2 car garage, my rent is going to be close to my house payment. The difference is the tax savings and I am building equity, which would be mine, not the landlord.

  21. indianaguy says:

    this is ridiculous and anyone who thinks renting is better is smoking crack. When you rent your basically flushing money down the toilet.

  22. Anitra says:

    @indianaguy: The first 5 years that you have a mortgage, you are “flushing money down the toilet” because 80-90% of your monthly payment is going to interest on your loan.

    Renting makes more sense in some cases. But if you’re ready to settle down, and willing to deal with any repairs yourself, you’re probably better off buying.

  23. kerry says:

    @AnitraSmith: This depends on the mortgage you get. My boyfriend and I did a lot of calculations of different mortgage lengths with different interest rates and points, and found that getting a 15 or 20 year mortgage and buying points to lower the interest rate gave us much more money towards the principle at the 5 year mark than a 30 year mortgage with or without points. The end result is that if we calculated cost per month versus equity with an anticipated time of 10 years in the home we found that a 20 year mortgage at 5.25% interest was the best deal. If we only wanted to spend 5 years in the home, we would have gone with a 15 year mortgage. For people who don’t plan on spending 20 years in their home, a 30-year mortgage is kind of a ripoff.

  24. Promethean says:

    I disagree, and think buying is almost always better, if you can afford it:

    1. Interest is tax-deductable

    2. When you sell your home, you can get back the money you’ve paid towards the loan, minus interest that wasn’t tax deductable. Usually a net gain if you hold the house for more than a year or two.

    3. When you sell your appartment… that’s right. You can’t. All money paid in rent is gone.

    Even if selling your home isn’t a net gain, the amount lost, averaged per/month, is likely oging to be less than renting.

  25. FINANCE101 says:

    The biggest problem with the calculator is the marginal tax rate of 20%. Who believes your tax rate is that low? Your Federal marginal tax rate is probably more likely to 28% alone. Add your marginal state tax rate and you are probably over 30%. Change that and you dramatically reduce the breakeven time for buying. Also – it is true that the real penalty for renting grows with time. Look what happens if you remain a renter for the next 30 years vs. owning real estate.

  26. Wally East says:

    What don’t people understand about all of the factors being mentioned being taken into account by the tool? The NYT thought of all of the factors being mentioned. They are in there. Really. And, still, renting can better be better financially than owning depending on the time frame.

    The only factors that can’t be accounted for are qualitative things such as pride of ownership or not feeling trapped by ownership.

  27. Trai_Dep says:

    Yup. For the rent-haters: you’re right as a general rule. Rent is like burning money.* End of story.

    * Except in a crazed real estate market where copious bogus loans were allowed, vastly increasing the money supply to the housing market, resulting in hyper-inflating values that are far, FAR above real value. If you live in one of the affected areas (coasts, cities that we’ve heard of…), odds are good that it’s best to sit it out until sanity eventually returns.

    Hey, what a great idea for a newspaper article! Or a blog entry! Maybe even add a dynamic tool that lets you adjust individual parameters so you can gauge individual break-even points for renting/owning!

    Sheesh, people: read the article. Really. I know it stings, but you might learn something.

  28. seanSF says:

    This is an excellent tool for helping to answer the financial question. Given how much information there is on the subject (this isn’t the first good rent vs. buy calculator), it’s amazing to me how adamant people are that buying is always better than renting.

    Here in San Francisco, the Chronicle has done a couple articles over the years about families who’ve sold their homes and rented a house. In the end, they were perfectly happy with the living situation and used their money in better ways.

    For us, we knew going in the financial aspects of our new house weren’t the best. It was a stretch for us to buy the place and, using the calculator, we’re not going to make much money over renting, even in 30 years. However, this house is not just an investment. It is a home. And that is why we bought it. We love this city, this neighborhood, and these four walls that we intend to raise kids in and grow old in for a long time to come.

    That’s something that calculator, for all it’s financial prowess, will never be able to tell me.

  29. arelys521 says:

    Hey, I’m just glad there’s a tool that validates my fear of committment.

  30. @Dr. Eirik: “Does that factor in the mortgage tax deduction you get when you buy?”

    Mortgage deduction is typically offset (at least partially) by property taxes and maintenance costs that renters don’t pay. We do fantastic on mortgage deduction-vs-property taxes where we are (small city in rural area) but my parents’ mortgage deduction doesn’t come CLOSE to making up their ridiculous property taxes.

    (Then of course property taxes are deductible but tax cost calculations start to get complicated and CPA-worthy at a certain point. :) And maintenance costs fluctuate yearly.)

    @indianaguy: “renting is better is smoking crack. When you rent your basically flushing money down the toilet.”

    Renting can be far better than buying if you’re:

    ***going to be somewhere a short period of time (in that case all the costs associated with buying outweigh any gains in equity, thus “flushing money down the toilet” by buying)
    ***unwilling or not capable of home maintenance
    ***very close to the margin in terms of affording rent or mortgage. Houses have FAR more “unexpected” costs than apartments do (as I noted in my post in the other thread, we’re look at several thousand dollars of SUPRISE! basement water damage), and frankly it’s a lot easier to find a cheaper lease if your money situation gets worse than it is to get yourself out of a mortgage you can no longer afford. The number of people I know who bought because it was “smarter” and bought themselves “house-poor,” and then ended up in bankruptcy, is astonishing.

    We bought, we could not wait to buy, and for us it’s by far the smarter financial decision. But it was also an emotional decision — we were married, we wanted the yard and the picket fence (okay, it’s chain link, and it’s pretty ugly) and a HOUSE that was all our own.

    I live in an area with a high turnover of young professionals who come to corporate HQ for a couple years for training/working under the eyes of management, and then get sent off to Shanghai or London or California to work at a remote site, so the rent-vs.-own differential in terms of amount of time you must own is quite stark here. I have several friends who bought because it was “smarter,” knowing they’d be moving in three years, and are now kicking themselves because their equity hasn’t yet made up the transaction costs. (And since it was a first home buy, all they were hearing was, “It’s better to own and build equity than to flush money down the toilet renting.”)

  31. mikesfree says:

    As a former landlord, it was better for some of my renters to rent. Especially people new in town, retired elderly who didnt want to deal with repairs or agregious condo fees.

    However, I guess what makes the most sense to me is buying. I live in the Midwest, so things are a little different here. But typically, if you are handy with anything, there are so many opportunities to buy a house below market and really make some money by fixing it up and staying for 2 years. The most recent purchase I made was a 3 bedroom, 3 full bathroom house in a very nice middle class neighborhood. Ok so its going to sound crazy to the typical person, but this house cost me 124k. The neighborhood runs about 165-175k in todays market. I have probably spent about 7k at the very most on improving the place.

    I did the same things in my rental properties. I bought low, made good cost effecient improvements, rented them, and then made money from appreciation in a hot market, plus my rent money coming in.

    There are a lot of smart buys out there, and I think this tool is cool, but it doesnt get everyones situation.

  32. mikesfree says:

    @Eyebrows McGee:

    “@Dr. Eirik: “Does that factor in the mortgage tax deduction you get when you buy?”

    Mortgage deduction is typically offset (at least partially) by property taxes and maintenance costs that renters don’t pay. We do fantastic on mortgage deduction-vs-property taxes where we are (small city in rural area) but my parents’ mortgage deduction doesn’t come CLOSE to making up their ridiculous property taxes.”

    My renters paid the tax as part of the rent, so I dont know how true that is.

  33. mikesfree says:

    And arent property taxes deductible?

  34. balagon says:

    One important point that is being missed: the calculator assumes that you are *investing* any money you would save by renting. Down payments, differences between rent and owning expenses–the calculator is assuming that you are saving that money. It even figures out your capital gains taxes, as well. So if you are thinking that since you can save lots of money by renting you can go buy a new car, do a lot of travel, whatever, you might actually be worse off (in a bottom line sense) renting.

    I tried out the calculator to see what it said about our decision 8 years ago to buy our current house. I’m not sure that I trust the results. The house value has doubled, which corresponds to an average appreciation rate of 9%, which obviously isn’t going to continue into the future. I boosted the maintenance and home improvement numbers and the down payment. And the calculator told me that we’d be better off buying than renting in a grand total of….one year. That’s nonsense.

  35. Wally East says:

    @balagon: Not intending to invest if you rent? Just set the tool’s “rate of return on investments” to 0%.

  36. balagon says:

    @rnkoneil: Thanks for noting that. I should have included that the calculator default assumes you are earning 5% on your invested bucks.

    Reading the comments on the NYT page, the best one simply states “Do what gives you the most peace of mind.”

  37. bigtech says:

    For all those who haven’t owned property:

    The mortgage interest deduction is not truly a savings. Instead you pay, say $10,000 a year (after taxes) in interest, which you can then deduct so the taxes you paid on that money are returned (around $3000). However, you’re still out the $10,000.

    Also, you get to pay property tax when you own every year. While this is also deductible, it’s the same as interest — you still have to pay it and it can be thousands of dollar annually.

    Also, there are a thousands in fees you will pay when buying or selling a house.

    All this is overcome when your house appreciates. But right now, that is not a given.