Strange that they buried the most important factor way down at the bottom of the 3rd page of "Advanced" options.
At its core, the whole rent vs buy economic decision boils down to comparing your expected returns investing in the housing market to your expected returns investing in the market in general. The rest of the factors in that calculator are just there to help you arrive at the conversion factor.
Since it's pretty much impossible to determine what the stock market and housing markets are going to do, it's probably best to base your home buying decision on something more rational. Such as "Do I want to own a house?"
For me, the answer to that question is quickly arrived at by asking a few of your homeowner friends what they did last weekend, and what they plan to do next weekend. The answer will invariably revolve around some form of maintenance on the house.
Like it or not, buying a house gives you a new full-time hobby. Lots of people like that hobby, and that's why they have houses. If gardening and cleaning gutters don't sound like fun to you, there are plenty of other ways to invest your money that are less hands-on.
Maintenance isn't so bad, and it doesn't require every hour of every weekend. But I've got a small apartment with a small patch of grass. It takes me 10 minutes to cut the grass and 20 to trim the hedges, once a month.
Like any hobby, you get out what you put into it. I spent 2 weekends gutting and renovating the kitchen, put ethernet and coax in every room, and wired my garden for electricity and music.
My last rental had 3 fireplaces, none of them worked because the owner, rather than paying someone to clean and maintain them decided to plug them up. Ethernet? forget about it. Cable in every room, not an option. The kitchen was nice and new, but designed to someone else's specification, not mine.
Nobody says you have to buy a big house. The amount of maitenance is directly proportional to how many plumbing fixtures, windows, appliances, lights, cabinets, etc you have.
If they had a rule of thumb, link between mortgage rate and investment return (eg. r-2 for savings accounts or r + 2 if you think you can beat the risk free rate consistently), would you be satisfied?
Increasing the rate of return gives you some interesting curves.
A simple way to quickly compare buying vs renting for entire areas is the "rent ratio", which is calculated by dividing an area's median house price by its annual rent. Obviously it just paints a geographical picture and each property should be evaluated individually before making any sort of specific buy vs. rent decision. We turned the rent ratios for the US into a heat map a few years ago (but keep it up to date): http://hotpads.com/search/rent-ratio-heat-maps
It's interesting to see just how sensitive the scale is to initial assumptions. But more important to me is the inefficiency created by the drag on movement - when you're renting, it's much easier to move, even when you've got furnishing and the whole lot etc. When you've bought, and you want to move, you may be at the mercy of the current state of the property market as to whether you make a loss or a gain, or even need to stay for a few years more.
I grew up in rented homes. Perhaps the most poignant thing is that the house I remember best (age 9 to 18 or so) has been renovated, sold etc. It's not somewhere I can ever go back to. But that may have been the case with a bought home anyhow.
I believe that it would necessarily be irrational to ever "need to stay for a few years more" because of the state of the housing market. (I do agree in general that you're more mobile as a renter, I just think think you've overstated it.)
An extreme example: You buy a house and then the value plummets to a fraction of what you paid. Why might you need to stay in that house? Other house prices presumably fell along with yours so you can still sell yours and buy a similar one. I think people find it painful to sell at a loss because it makes a loss on paper become explicit. If you don't sell then you can tell yourself that you're speculating -- you really think your house is worth more than it will currently fetch so it's imprudent to sell. But probably you're not smarter than the market in that regard. In other words, there's no harm in turning a loss on paper into an explicit loss.
Bottom line, if you want to move from house A to house B and the price difference (plus moving costs) is worth it, then do it, with no thought at all to the price you happened to have paid when you bought the first house.
Of course, moving costs when realtors are involved are huge so the original point partially stands. You're never stuck in the sense the parent implied, moving is just more expensive when you buy vs rent.
Buying is as much a emotional decision as it is a financial one.
You have to take into account not only the how much you can afford and how much you want/would like your money to grow but what kind of lifestyle you desire. If the lifestyle that owning one's home affords is more important than the increased returns then perhaps you should buy. On the other hand if you are happy to rent for a decade or two you will likely end up richer.
I am currently of two minds, I love the idea of being able to do what I like to my own home. But at the same time real estate isn't necessarily the best investment, though where I am (Melbourne, Australia) we've had massive growth in housing prices (somewhere in the order of 20%+pa off the top of my head) though it is slowing down now.
Another piece of the lifestyle choice is control. While renting you are at the mercy of the landlord. I found this out last year when our landlord decided she wanted to move back into her house. Even though we had a lease, and the law is suppose to protect you, it doesn't stop them from making your life miserable - and that cost isn't worth any amount of money to me.
Banks are pretty happy to let you borrow against your house. They're not likely to do so as easily with other investments. Means you can try to have your cake and eat it too if you're clever . . and perhaps a bit lucky too.
If you are doing the startup thing, it may be worthwhile keeping your financial obligations/footprint to a minimum. You can always downsize a rental, but a mortgage is not so easy to exit.
Plus, that mortgage downpayment might be better invested in yourself and your venture?
There are factors besides the rent vs buy calcs worth considering esp for entrepeneurs.
Let's see. Housing is propped up by the policies of a government that is currently borrowing 43% of the largest budget in human history. Will it be able to continue doing either indefinitely?
If you think so, by all means buy a house.
But if you think everybody reaps what they sow, think twice.
FWIW: the dynamics of governments borrowing - particularly governments with control of their currency, and debts denominated in that currency - are in no way like personal borrowing.
If the country we are talking about was at or close to its richest point, and it is in a bad recession, I would expect its budget to be very large with a significant portion of borrowing. To do otherwise would be irresponsible.
Not living in the US, but also worried about my government giving away all my money: isn't real estate one of the safer options? All my money and other investments, the government can simply take away (taxes) or devalue. Even gold is not safe - history shows that the government will try to get it, too.
Now the government could of course also try to take my house, but I think the public outcry would be bigger than for other investments - so it seems even more of a last resort governments would choose than other forms of taxpayer exploitation. Am I wrong?
Interesting - on the few California properties I tried, it says it never makes sense to buy, no matter how long you live there.
This could actually be true in some areas. Prices are still really high relative to rent. The Houston prices I put in made sense to own after a 2-3 years.
I noticed the same. Who looks only at the figures? I certainly don't and I suspect that most people just partially factor them in.
For me, the biggest factor is that does the apartment or house feel like my home. If it does, then I will consider buying or renting, depending on whether it's on sale or to let.
This is a superb calculator, however it assumes a faster growth rate relative to inflation than is likely. Try it with a -1% appreciation rate (which is the historical average for residential real estate since ww2)
Another thing to check is condo or homeowner's association fees. The default value in the calculator is 0, but for many condos the fees are 1/4 or more of what you'd pay in rent on a comparable apartment, which makes a huge difference long-term.
I bought a house. According to this calc i may or may not have been a good idea based on how the house appreciates (I got it at the bottom of the market).
But at the end of the day my house is like 4x bigger then my apartment. So worth it even if it does not end up being an over all savings or not.
One common technique for lowering the cost of a mortgage is to make one additional payment per year and/or each month. This lowers the principal and makes subsequent interest payments lower.
Although, not everyone can afford that it would be nice if this calculator would allow you to factor that in. I suppose you can fake it by altering the interest rate an appropriate amount but I'm not sure it follows the same curve.
I don't believe this is really a factor. Paying down the principal faster saves you the 5% (or whatever your mortgage rate is) interest on the amount of your pre-payment. It's tantamount to investing that money at a risk-free 5%. That might be the smartest thing to do with your savings but it doesn't change the calculus fundamentally.
Buying a house with a suitcase full of cash or getting a zero-amortization (infinity-year, ie, interest-only) mortgage or anything in between is all roughly financially equivalent if you have alternative investments available.
Actually the longer the mortgage term the bigger total tax deduction you get, so in that sense the more you pre-pay the costlier it is.
Concepts like compound interest and tax calculation based on a known rate are based on straight mathematics, not politics. The only thing different between now and then is the starting figures you enter in the calcuator.
[+] [-] jasonkester|15 years ago|reply
At its core, the whole rent vs buy economic decision boils down to comparing your expected returns investing in the housing market to your expected returns investing in the market in general. The rest of the factors in that calculator are just there to help you arrive at the conversion factor.
Since it's pretty much impossible to determine what the stock market and housing markets are going to do, it's probably best to base your home buying decision on something more rational. Such as "Do I want to own a house?"
For me, the answer to that question is quickly arrived at by asking a few of your homeowner friends what they did last weekend, and what they plan to do next weekend. The answer will invariably revolve around some form of maintenance on the house.
Like it or not, buying a house gives you a new full-time hobby. Lots of people like that hobby, and that's why they have houses. If gardening and cleaning gutters don't sound like fun to you, there are plenty of other ways to invest your money that are less hands-on.
[+] [-] yardie|15 years ago|reply
Like any hobby, you get out what you put into it. I spent 2 weekends gutting and renovating the kitchen, put ethernet and coax in every room, and wired my garden for electricity and music.
My last rental had 3 fireplaces, none of them worked because the owner, rather than paying someone to clean and maintain them decided to plug them up. Ethernet? forget about it. Cable in every room, not an option. The kitchen was nice and new, but designed to someone else's specification, not mine.
[+] [-] krschultz|15 years ago|reply
[+] [-] netcan|15 years ago|reply
Increasing the rate of return gives you some interesting curves.
[+] [-] drp|15 years ago|reply
[+] [-] barrkel|15 years ago|reply
I grew up in rented homes. Perhaps the most poignant thing is that the house I remember best (age 9 to 18 or so) has been renovated, sold etc. It's not somewhere I can ever go back to. But that may have been the case with a bought home anyhow.
[+] [-] dreeves|15 years ago|reply
An extreme example: You buy a house and then the value plummets to a fraction of what you paid. Why might you need to stay in that house? Other house prices presumably fell along with yours so you can still sell yours and buy a similar one. I think people find it painful to sell at a loss because it makes a loss on paper become explicit. If you don't sell then you can tell yourself that you're speculating -- you really think your house is worth more than it will currently fetch so it's imprudent to sell. But probably you're not smarter than the market in that regard. In other words, there's no harm in turning a loss on paper into an explicit loss.
Bottom line, if you want to move from house A to house B and the price difference (plus moving costs) is worth it, then do it, with no thought at all to the price you happened to have paid when you bought the first house.
Of course, moving costs when realtors are involved are huge so the original point partially stands. You're never stuck in the sense the parent implied, moving is just more expensive when you buy vs rent.
[+] [-] hartror|15 years ago|reply
You have to take into account not only the how much you can afford and how much you want/would like your money to grow but what kind of lifestyle you desire. If the lifestyle that owning one's home affords is more important than the increased returns then perhaps you should buy. On the other hand if you are happy to rent for a decade or two you will likely end up richer.
I am currently of two minds, I love the idea of being able to do what I like to my own home. But at the same time real estate isn't necessarily the best investment, though where I am (Melbourne, Australia) we've had massive growth in housing prices (somewhere in the order of 20%+pa off the top of my head) though it is slowing down now.
One of my favourite bloggers Ramit Sethi has some strong opinions on the issue http://www.iwillteachyoutoberich.com/buying-a-house/
[+] [-] duck|15 years ago|reply
[+] [-] hartror|15 years ago|reply
Banks are pretty happy to let you borrow against your house. They're not likely to do so as easily with other investments. Means you can try to have your cake and eat it too if you're clever . . and perhaps a bit lucky too.
[+] [-] yummyfajitas|15 years ago|reply
[+] [-] dreeves|15 years ago|reply
(I'm so proud of that article! I think it's literally the most popular thing I've ever written. It was even translated into Spanish.)
Short version: Neither choice is a no-brainer. It comes down to all the auxiliary aspects of the decision like tax benefits and personal preferences.
[+] [-] asanwal|15 years ago|reply
Plus, that mortgage downpayment might be better invested in yourself and your venture?
There are factors besides the rent vs buy calcs worth considering esp for entrepeneurs.
[+] [-] stretchwithme|15 years ago|reply
If you think so, by all means buy a house.
But if you think everybody reaps what they sow, think twice.
[+] [-] barrkel|15 years ago|reply
If the country we are talking about was at or close to its richest point, and it is in a bad recession, I would expect its budget to be very large with a significant portion of borrowing. To do otherwise would be irresponsible.
[+] [-] Tichy|15 years ago|reply
Now the government could of course also try to take my house, but I think the public outcry would be bigger than for other investments - so it seems even more of a last resort governments would choose than other forms of taxpayer exploitation. Am I wrong?
[+] [-] barmstrong|15 years ago|reply
This could actually be true in some areas. Prices are still really high relative to rent. The Houston prices I put in made sense to own after a 2-3 years.
[+] [-] petercooper|15 years ago|reply
[+] [-] yason|15 years ago|reply
For me, the biggest factor is that does the apartment or house feel like my home. If it does, then I will consider buying or renting, depending on whether it's on sale or to let.
[+] [-] sanswork|15 years ago|reply
[+] [-] kirubakaran|15 years ago|reply
[+] [-] grandalf|15 years ago|reply
[+] [-] modeless|15 years ago|reply
[+] [-] STHayden|15 years ago|reply
But at the end of the day my house is like 4x bigger then my apartment. So worth it even if it does not end up being an over all savings or not.
[+] [-] rokhayakebe|15 years ago|reply
[+] [-] nradov|15 years ago|reply
[+] [-] po|15 years ago|reply
Although, not everyone can afford that it would be nice if this calculator would allow you to factor that in. I suppose you can fake it by altering the interest rate an appropriate amount but I'm not sure it follows the same curve.
[+] [-] dreeves|15 years ago|reply
Buying a house with a suitcase full of cash or getting a zero-amortization (infinity-year, ie, interest-only) mortgage or anything in between is all roughly financially equivalent if you have alternative investments available.
Actually the longer the mortgage term the bigger total tax deduction you get, so in that sense the more you pre-pay the costlier it is.
[+] [-] po|15 years ago|reply
[+] [-] DLWormwood|15 years ago|reply
[+] [-] unknown|15 years ago|reply
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[+] [-] dgroves|15 years ago|reply