Rent or Buy? Part2

Since the last blog I’ve been surprised to find a lot of support for my claim that renting may actually beat owning your home. Patrick.net is a great source for daily info culled from the nation’s largest sources, and there have been a lot of articles about investors who can’t even cover their costs with their rental income. There are also a number of “Rent vs Buy” calculators where you put in your numbers and see who comes out ahead.

Conditions have changed (lower interest & investment rates) and I left out a couple items (sales commission and property tax deduction) on my last analysis so I’ll run the numbers again on the same two properties in San Francisco. Again, the question is whether you’d make more money renting or buying your current apartment. Assume the renter and owner both spend the same amount each month, and if the rent is less than the homeowner costs, the renter puts the difference in the bank. At the end of a number of years they both decide to move to Tahiti, the owner sells, the renter closes out their bank account. Now neither one has a home, but who has more cash? If you grew up in America you were always told the owner does. Let’s see.

Here’s the facts and assumptions:

For a five year timeline, my calculations [download them] show the renter comes out ahead slightly, by $13,000. Pretty much a wash. I assume constant annual costs even though they actually change, like all those other rate assumptions, so there is a big margin of error. One of the biggest assumptions is the appreciation rate of 5%. This may be very optimistic since many sources are predicting the opposite, that prices continue to fall nationwide for the next couple years.

To make the same comparison over longer periods of time I turned to the online calculators because the little errors start to pile up. The New York Times [calculator] agrees with me that the renter comes out ahead (but by $52k) for the five year period, and for any time period up to 30 years. As long as home appreciation is below interest rates, the renter wins. But when SF gets back to it’s 25-year average of 8% appreciation then the owner wins big by $2M over 30 years.

The calculators are nice because it’s easy to see the effects of each separate factor. What if I double my down payment? Or if rents, inflation or investment rates increase? All those things make a difference, but not nearly as much as the combination of interest and appreciation rates. This makes common sense; if I borrow $1M at some rate for 30 years, and it increases in value at the same rate then I’m breaking even. All those other factors don’t do much to change the outcome. The interest/appreciation of the asset is the 800 pound gorilla, and all those other factors are like flies buzzing around it.

Another “Rent or Buy” calculator by Yahoo is not so hot. It predicts the opposite, that the renter loses by $20k in five years, like people have been saying for years. But the huge problem with this analysis is the owner paid about $30,0000 more each year! Try it for yourself, and look at what the owner pays, twice as much as the renter even after the big tax benefit. So while the renter pays $20k/year, the owner pays $50k/year and after five years comes out ahead by only $20k? That still sounds like a rip-off to me.