Whether to rent or buy, as everyone knows, is a complex calculation. Today the NY Times published a very clever and easy-to-use tool that does much of the work.
It’s a bit of a challenge to explain the tool here, but use the link above to take a look. There are 22 slide bars, each being one of the variables. These include home price, mortgage interest rate, inflation and so on. Each defaults to the common national norm. Changing any of the 22 assumptions changes the box at the top which solves to a dollar amount called “If you can rent a similar home for less than … [$____] … then renting is better”.
The model solves for costs after 10 years for both the rental and purchase scenarios. It contemplates that there is a big cash investment upfront for most purchases, carrying an opportunity cost of not having the money invested elsewhere. That figure is compared with the higher cost of ownership, and shows the amount of proceeds from a sale at the end of the period. Inflation of holding costs and rent, investment returns to the renter whose money is not tied up in a down payment, and the appreciation rate of property ownership, are key assumptions in the model.
The NY Times Your Money column published a related piece that discusses the rent/buy decision earlier this year. It cites a number of academic studies and offers a few more simple rules of thumb. For instance, “Never pay more than 15 years’ fair rental value for any home, or 180 months of rent.” The article considers the “enforced savings” aspect of home ownership, acknowledging that rent/buy calculations that assume renters will actually invest in other markets what they don’t put into a home purchase. Real-world behavior of many renters suggests otherwise, and that failure of renters to save can leave them without the retirement nest egg that homeowners often build for retirement.