To rent or to buy a house??


Spurred by some com­ments to a pre­vi­ous post I quickly run these num­bers. They an­a­lyze the case of house price not ris­ing in the next five years. I’ll take more time to check them if I re­ally get to a point of de­cid­ing, but they should be cor­rect.


This data (fairly typ­i­cal in my area):


Home price: $200,000

Down pay­ment: $0

Interest rate: 6%

Monthly mort­gage: 1210

Rent: 750

Annual gains on in­vest­ments: 6%


If I run this for 5 years and house ap­pre­ci­a­tion 0% I get:

$33,043 on in­vest­ing the rent-mort­gage dif­fer­ence

$30,609 on pay­ing the mort­gage (equity ac­cu­mu­la­tion + tax sav­ings at 28%)


If we as­sume to put down 20% to buy the house then the num­bers are even worse:

$83,542 on in­vest­ing the down pay­ment and the rent-mort­gage dif­fer­ence

$67,548 on pay­ing the mort­gage (equity ac­cu­mu­la­tion + tax sav­ings at 28%)


There are other things to con­sider: house re­pairs for houses, an­nual raises in rent, etc etc


Are those as­sump­tions rea­son­able? So it is bet­ter to rent than to buy? Well, over the long term houses do tend to ap­pre­ci­ate and the more lever­age you have, the more you reap the ben­e­fits. Over the short term, run your num­bers. There are so many as­sump­tions you can make, that it be­come al­most a per­sonal opin­ion what is best.


Running the num­bers help you in mak­ing sure than it is at least an in­formed opin­ion. It makes your as­sump­tions ex­plicit




Have you con­sid­ered a sce­nario that in­cludes pay­ing off the house ver­sus rent­ing the rest of your life? Or do you def­i­nitely plan on buy­ing, just try­ing to find the right tim­ing.
Like it or not there are emo­tional de­ci­sions that play into this. Will you be hap­pier own­ing or rent­ing? Surely, the amount you save or earn on rent­ing or buy­ing is­n’t what solely will de­ter­mine your hap­pi­ness about where you live? Is it?

Don’t for­get the trans­ac­tion costs in­volved in the pur­chase (agent fees are prob­a­bly the li­on’s share).

Luca Bolognese


You are cer­tainly right. No in­vest­ment re­sult is worth not be­ing happy. I’m just talk­ing num­bers here. The rest (which is much more im­por­tant) is hardly quan­tifi­able.

I re­cently com­pared buy­ing a $300K house to rent­ing, and I was sur­prised, over 30 years the house would grow to $500k in­vest­ing the dif­fer­ence be­tween my rent and the mort­gage pay­ment (even as­sum­ing that the rent in­creases 100% over 30 years) re­sulted in a cash lump sum of $700K, so as­sum­ing you have the will power to save the money that you were go­ing to use on a mort­gage you’d be 200K richer af­ter 30 years, not a bad sit­u­a­tion :)

Hmm, not only is the house I’m buy­ing less than half the cost you listed, my mort­gage rate is fixed at 4.50% (and $5K to­wards clos­ing costs that I don’t have to pay back, yay SONYMA). Right now my rent is sup­posed to be $650/mo for ~800 sq-ft apart­ment (currently i have a mas­sive dis­count due to ren­o­va­tions though), but my mort­gage pay­ments will be ~$800 (after taxes etc.) for a ~1475 sq-ft house. And I get a dri­ve­way, yard, garage, etc.
For me buy­ing def­i­nitely was the bet­ter op­tion. It’s kind of like buy­ing vs. leas­ing cars though. There are so many fac­tors for each per­son, it re­ally makes it dif­fi­cult to slap a sim­ple for­mula on it. Plus the emo­tional stuff like Steve K men­tioned above.

Luca Bolognese


I came to sim­i­lar con­clu­sions. Houses look vastly over­priced right now. There is some­thing you can do to make houses look more at­trac­tive. For ex­am­ple, all the eq­uity in your house is money that is earn­ing 0% rate of re­turn. But this is a mat­ter for an­other post:)

Luca Bolognese


As I said in my re­ply, money are not the only fac­tor. They are not even the most im­por­tant one. But you should be aware of the ram­i­fi­ca­tions (or bet­ter the as­sum­pi­ons, nonone knows the ram­i­fi­ca­tions given un­cer­tainty about the fu­ture) im­plied in your choices.
BTW: travis, it looks like you got a pretty good deal. Not too many ft1475 houses for your price in my area.

But with a house you get to deduct the in­ter­est you pay on the mort­gage. For the $200,000 mort­gage at 6% this is $11933.19 per year. In aad­di­tion you get to deduct the real es­tate taxes. In my area for this house that would be $4700. So you have to fac­tor in that you won’t get taxed on 16633.19 of your yearly in­come. That can make a big dif­fer­ence.

Mike Kozlowski


If that $200K house is big­ger than a $750 apart­ment (around here, it’d be nearly twice the size), you need to ac­count for that in your cal­cu­la­tions — you’re ba­si­cally pay­ing ex­tra to live in a larger place, and not com­par­ing ap­ples to ap­ples.
If the apart­ment is the same size/​qual­ity level as that house, though, then ei­ther you’ve got cheap apart­ments or ex­pen­sive houses…

Also it’s not re­ally fair to as­sume 0% ap­pre­ci­ate for houses. When I bought my house 8 years ago I though prices were out­ra­geous and could­n’t imag­ine how they could go up much more. I’m about to buy a new house and have the same thoughts but I know that 5 years from now I look back and laugh as how cheap it seems. I bought my house (a 1000 sq ft ranch) for $140,000 and now it’s worth about $210,000 so that’s $70,000 in my pocket.

Tobin Titus


It’s called LIBOR loans. You pay in­ter­est only on a loan that is an ARM (adjustible rate). Don’t flinch too much on the ARM thing though. The rate is based off of the London Inter-Bank Overnight Rate. This is what banks in lon­don charge each other for overnight de­posits. Even when in­ter­est rates were sky­rock­et­ing in the US at 12%, the LIBOR rate was at 7%. I cur­rently only pay in­ter­est on my house — free­ing that large prin­ci­pal pay­ment up for more lu­cra­tive in­vest­ments. I have a $180K home in Charlotte, NC that I pay only $850/month - that in­cludes my taxes, in­sur­ance and home own­ers as­so­ci­a­tion fees as well.
I left a 1200sqft apart­ment that cost me $950/month for this op­tion that also lets me write off the bulk of that pay­ment in taxes so my pay­ment ul­ti­mately turns out to be about $600/month af­ter tax ben­e­fits.
Even af­ter pay­ing the ex­tra fees like garbage col­lec­tion and such, I’m saving” tons of money over rent­ing and keep­ing my money liq­uid enough to in­vest.

My house went from $160k to $250k in just 2.5 years. It seems ab­surd to as­sume a 0% ap­pre­ci­a­tion. Particularly where I live. Had I paid _no_ rent and saved every penny from my mort­gage and util­ity pay­ments (say, lived with my par­ents) that’s about $45,000 — still half of what I got with ap­pre­ci­a­tion (I’m ig­nor­ing any in­ter­est gained by in­vest­ing and money gained through tax write-offs, so it should bal­ance a lit­tle bit).

First of all, there are other is­sues such as a larger liv­ing area and just gen­eral qual­ity of life and pri­vacy. What about hav­ing a back­yard? What about be­ing able to turn up your TV? What about hav­ing a yard for your kids to play in??
But if you want to keep it fi­nan­cial - here are some things to con­sider.
First, 0% ap­pre­ci­a­tion is VERY rare. But even as­sum­ing that, you need to run those num­bers out fur­ther than 5 years. That’s very short-sighted for such a large pur­chase.
I worked this up on a spread­sheet. Using your num­bers, here are some things to con­sider.
In 2009 (as an iso­lated year), you will have al­most $19,000 in tax write­off and eq­uity in your house. If will cost you out of pocket 2,900 less to rent - but your NET sav­ings for the year will be around $16,100.
In 2014 (ten years from now, look­ing at one iso­lated year), you will have al­most $38,000 in eq­uity and in net tax sav­ings. It will cost you 270 dol­lars MORE to rent by then (because of rent in­creases), so your NET sav­ings that year will be al­most $38,000!!
So yes, look­ing at your out-of-pocket in the next cou­ple years - it does­n’t make much sense, but when you look at the big­ger pic­ture, it’s painfully ob­vi­ous that this choice” is not a choice at all. You should get into a house as soon as you can rea­son­ably af­ford it.
Good luck…

and For ex­am­ple, all the eq­uity in your house is money that is earn­ing 0% rate of re­turn.” - that is ver­sus rent­ing where the money you would’ve put into the mort­gage is gone.
So I’ll take 0% rate of re­turn over 100% loss any day.

Mikhail Arkhipov (MSFT)


Over the course of few years prices of homes in my area raised sig­nif­i­cantly (like 50%). You have to con­sider real es­tate price trends as well.

Marc LaFleur


Um.. Where do you live that I can get the square-footage and pri­vacy of a $200,000 house for $750/month?

Luca Bolognese


I’m not im­ply­ing in any way that rent­ing is al­ways a bet­ter choices that buy­ing. Infact I bought a home. Buying is al­most al­ways bet­ter. Moreover, as I said in a cou­ple of pre­vi­ous re­ply, noth­ing is more im­por­tant than your hap­pi­ness.
My whole point is that de­pend­ing on the as­sump­tions that you make, the choice changes. If you make the as­sump­tion that houses are go­ing to re­turn 0% or less in the next 5 years, then, de­pend­ing on one zil­lion of re­lated things, then there may be a bet­ter place for your money in the next 5 years.
Now, will houses re­turn 0% in the next 5 years? For the next 10 years? I don’t know (and nei­ther do you!!). There are dif­fer­ent opin­ions on the mat­ter (http://​​lu­cabol/​archive/​2004/​07/​28/​199712.aspx for an ed­u­cated con­trary opin­ion).
Intellectually I refuse to ac­cept that houses are al­ways the best in­vest­ment. You have to make your as­sump­tions, run your num­bers and de­cide for your­self. I’ll prob­a­bly post a spread­sheet so any­one can do just that.

Looking at a house for a 5 year in­vest­ment is a bad idea, you won’t start see­ing sig­nif­i­cant un­til af­ter that. So if you HAVE to be out in 5 years, you may lose money. But if you plan to own a home more than 5 years, then it will start pay­ing off - and BIG af­ter 5 years and con­tinue on.
And make no mis­take, there is EXPONENTIAL pop­u­la­tion growth on this planet and a fixed amount of in­hab­it­able space. This is ba­sic sup­ply and de­mand - real es­tate will ALWAYS go up. But for big pur­chases like this, you have to be will­ing to put in the time - and you will see that it WILL pay off - you just need to give it more time.
Personally, I think you have a re­ally, re­ally skewed view and if you play this 5 years at a time” game, in 10 or 15 years, you’re still go­ing to be rent­ing and with­out a penny of eq­uity. And on top of that, mis­er­able be­cause you are right on top of your neigh­bors.. but - you gotta do what you gotta do, good luck! :-)

Eric Gunnerson


The low in­ter­est rates have al­lowed house prices to jump up quite a bit, be­cause peo­ple choose houses based on whether they can af­ford the monthly pay­ment, not the to­tal pur­chase price. This is mostly true for ve­hi­cles as well.
This does mean we’re in a bub­ble, and we could ex­pe­ri­ence a de­val­u­a­tion in hous­ing prices as some other places did in the 1980s. But Seattle is still a pretty de­sir­able place to live, and I ex­pect that if/​when rates go up, it will just cool things down and house prices will re­main fairly sta­ble for a num­ber of years. That’s as­sum­ing there is­n’t a big in­flux of money - the Microsoft money of the late 90′s com­bined with the money of those who came from more ex­pen­sive mar­kets pushed things up.
There are two big fac­tors push­ing to­wards own­ing, in my book:
1) Control. I can do what I want with my house
2) Forced sav­ing. For a lot of peo­ple, it’s the dif­fer­ence be­tween pay­ing a mort­gage or spend­ing the ex­tra money, not in­vest­ing it.
Having done both, I much pre­fer own­ing.

Luca Bolognese s WebLog To ren