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My partner and I are looking into buying a house versus renting in our city (USA), and we would like make sure we've accounted for all the relevant variables and that our assumptions are reasonable. Our results seem to be inconsistent with the general idea that you can recoup the cost of buying a house in a few years (e.g. this bank rate article)

For buying a house we assumed the following:

  1. Price of house is about $310000 (common for our area) with an interest rate on the mortgage on 7.12%
  2. Down payment of $70000 (for ease of calculation) and interest payments calculated from the amortization function found here
  3. City and State propery taxes (higher than average)
  4. Annual home value appreciation of 3%
  5. Closing costs 5.8% of house cost
  6. Cost of selling the home 10.5% of sale price (we're likely to have to move again in about 5 years)
  7. Homeowners insurance of $125/mo
  8. 1% of the house cost saved for maintence per year

For renting, we assumed we could invest the downpayment money instead and so we have:

  1. Rent is $2200 per month, with a 5% increase in rent prices per year (worst case).
  2. 3% annual growth in $70,000 in savings (just for ease of calculation)
  3. $100/year in renters insurance

I essentialy just added up all costs and benfits over time for buying versus renting and generated the plot below. I plotted this upto 15 years out just see how the function develops, but it seems we would still lose quite a bit money from buying though not as much as renting.

figure for cost of buying versus renting

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    Check that homeowner's insurance number. Depends on what protection you purchase, the value of the house, where it is... And check whether you will need flood insurance. If you mortgage more than 80% of the value (in the US) you will also need insurance to protect the lender and will be forced to deal with escrow account, which together add up to a good reason to be able to pay at least 20% as down payment .
    – keshlam
    Jan 8 at 4:31
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    You're presenting it not in a usual way, but the bottom line is the same: the break even is at about 5 years of ownership, after which ownership is cheaper than renting
    – littleadv
    Jan 8 at 7:52
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    when you say both lose money how are you addressing the fact that you need to live someplace. Also does the place you can buy for 310K equal what you can rent for 2200? Jan 8 at 23:07
  • You can get 5% CDs right now, for almost any duration you want. I would use 5% for your savings yield, rather than 3%. Jan 9 at 13:40

2 Answers 2

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Over a 5-year timeline with current rates, it's probably a coin flip as to whether or not buying beats renting. There are other factors to consider with owning vs renting that may be more important to you than small financial difference between the options, so don't neglect those.

Regarding the calculation you've done a good job of laying it out, but I'd push on a couple of the numbers:

  • 5% annual rent increase is likely too low for your worst case
  • 5.8% closing cost to buy seems high, confirm that's a typical buyer closing cost in your area (varies significantly by state due to transfer taxes)
  • 10.5% of sale price to sell seems high unless you're covering closing costs for buyer.

You could get unlucky on timing and have it be a seller's market when you buy (seller's unwilling to cover your closing costs) and a buyer's market when you sell (buyer's expecting you to cover closing costs), but otherwise these buying/selling numbers might be too high.

You've listed a worst-case rent increase but stuck with a 3% appreciation rate/investment rate which feels like oversimplifying key variables. I'd suggest considering a wider range of possible outcomes. For my projections I like to start with best guesses for all variables then create optimistic and pessimistic variations.

Another potential wrinkle, it could happen that a year or two in you're able to drop interest rate at no cost to you. I wouldn't count on it, but it is something many people seem to be factoring into buying decisions currently.

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First, your plot shows that renting will continue to cost you a similar amount of money every year whereas buying will cost you less and less per year the longer you stay in there. This is as expected, so in general your modelling seems correct.

For specific numbers, you put a 7.12% interest rate on the mortgage. That seems quite high to me but I'm not familiar with current US rates. At the same time you put only 3% interest on the saving. This seems quite low especially compared to the mortgage interest. Typical returns for ETFs in the US are more around 7%, even if you want a conservative estimate here I would go higher than 3%. Don't just put the savings into a checking account.

You put a mortgage value of $310000 and a rental price of $2200 per months. That comes to $26400 rent per year and is saying that the mortgage value corresponds to just under 12 years of rent. That seems very low to me. Does the rent include heating/ utilities? Then substract this if you want to compare to buying (or add this cost for the buying option). In general I would expect a home value to be around 20 to 30 years worth of rent. Check this with numbers from your location.

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  • ETFs can give returns from 20% to minus 20%. You can't really predict their returns at all. Please note at if you are talking about forecasting 30 years in the future, the US had several major market upheavals in the last 30 years, and although the market is overall up in the last 30 years, that was not true for every 30-year period. Jan 10 at 9:24

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