Rent vs. Buy? Should You Rent or Buy Your Home?

Sure, there are some intangible advantages to owning your own home, like doing whatever you want to the back yard, or remodeling the kitchen, or painting the kid’s room purple. There is the advantage of knowing that no one can make you move – as long as you can afford your monthly payments.

But a home is an investment too. When considering a home purchase, you should at least know the financial cost you are paying to own a home, or the benefits you could receive if the home appreciates.

When calculating your rent vs. buy decision, don’t forget to factor in some of these costs:

  • Home Maintenance – You can spend a large amount of money in maintenance and updating a home. Home maintenance varies by area, and depends on how old your home is and how much work you choose to do by yourself. Some possible maintenance items may include pool maintenance, tree trimming, air conditioning/heating maintenance, septic maintenance, home painting, landscaping, etc. If your home isn’t new, you should also factor in replacement costs of appliances, roof, kitchens, bath, carpet, etc. For example, if you know you’ll have to replace your refrigerator in 2 years, you should set aside $50 per month for that future expense.
  • Taxes and Insurance – These are a little easier to track as most homeowners have these escrowed (included in the monthly mortgage payment and paid out by the mortgage company). But before purchasing a home, ask your real estate agent to give you past tax history on the home. Contact your insurance agent to determine how much a policy on the home will cost.
  • Homeowner’s Association fees – Some homes are in a homeowner’s association which carries an extra monthly fee. Find out the monthly fee from your real estate agent.
  • Selling costs – Unless you plan on staying in the home forever, you’ll need to factor in costs to sell the property. Ask your real estate agent what the owner will be paying in closing costs when he sells the property to you. Closing costs for sellers can include attorney’s fees, title insurance, and real estate commissions.

But now for the good news. Owning a home has some financial advantages that you can use to offset some of these costs.

  • Appreciation – In most years, homes appreciate in value. Your real estate agent can help you determine how much homes in the area have increased in value in the past 5 or 10 years. Though real estate is cyclical, if you look at a longer time frame, you should be able to get a ballpark estimate as to how much your home may appreciate every year.
  • Tax Savings – If you plan to have a mortgage on a property, you can deduct your interest from your taxes, in effect decreasing your monthly mortgage payment. Ask your accountant what your yearly savings will be. As a ballpark, you can multiply your yearly interest payment times .25 to get your yearly savings in taxes.
  • Principal – remember that some of your payment is principal that you get back when you sell your home (if you sell it for more than your purchase price. Though the first few years are mostly interest payments, some is principal.

You can use the Rent vs. Buy calculator found on this website to help you in your decision. As an example, I entered a home value of $250,000 with $2000 in annual maintenance. When I sell the home in 5 years, it will cost 7% of the home’s value. I think the home may appreciate at a 4% rate every year. My loan is for $200,000 at a 5% interest rate for 30 years. My income tax rate is 26%, my annual taxes are $1600 and annual insurance is $1500. Other homes like mine rent for $1500 per month, and rent has been increasing by 4% every year. Should I rent or should I buy?

Rent vs Buy

According to the Rent vs. Buy calculator, I am going to be MUCH better off by owning a home. My home purchase benefit is $108,869 minus my original $50,000 down payment is $58,869. Pretty good for a 5 year home ownership stint! Of course this amount may vary greatly if your actual appreciation is more or less than the 4% I entered in my calculation. At a 3% appreciation rate, I will still be better off buying, but only by $32,696.

One factor not included in this calculator is the Opportunity Cost of your down payment. If you rented, how much would your down payment make if you invested elsewhere?

Once you’ve finished your analysis, you’ll want to keep it to see how you’ve fared when you sell your home. And if your projections were a bit too rosy, remember that a home purchase isn’t always about the money, but coming out ahead makes your next home buying decision a bit easier.

Rent vs Buy Calculator