The Best "Rent vs. Buy" Calculator

Thanks, Mary Ellen, for sharing this cool link with me: One of the best Rent vs. Buy calculators I’ve seen, especially for the visually-oriented and “what if” type of people:

Rent vs. Buy Calculator

Check out the “Advanced Settings,” especially on Buying, where you can enter such things as condo fees (count on at least $250-300) and costs of buying home (about 3% for closing costs is a good rule-of-thumb) and selling (count on 7-10%), maintenance costs, It even lets you enter the return on alternate investments and inflation rate, and the capital gains exclusion (see “Tax Benefits of Home Ownership” post). This is simply the most thorough calculator I’ve seen.

The only downside to this particular calculator is that it doesn’t allow for different financing scenarios–say an ARM loan or interest only loan. (No, interest-only loans are not instruments of the devil; in fact for some borrowers it is a fantastic option. They’ve been abused quite a bit in the past few years in this area, and now there’s an unreasonable backlash against the product.) Nonetheless, it’s an excellent tool overall and includes many “hidden” costs of homeownership.

Of course, the breakeven point always depends on your assumptions, so what are some “reasonable” ones? Reasonableness is in the eye of the beholder, but a conservative estimate of property taxes in this area is 1%. Long-term appreciation rate is of course a huge driver; the long term average, according to the GMU study I’ve reference in previous posts, is 7%, though of course 2006 was much less than that. GMU estimated 2.2% appreciation in 2006, currently is predicting somewhere between 0-5% in 2007, and expects a return to the long term average of 7% by 2008-09.

Here is the NY Times article that accompanies the calculator. Interestingly, the article is an argument to rent over buying, which is the best option for lots of people. These types of articles paint the market with a broad brush, by necessity–they have a national audience. But if there’s one thing everyone knows about real estate, it’s location, location, location. All real estate, like politics, is local. Don’t take someone’s word for it that buying is the right answer for you–use your own assumptions and tools, like this one. But in my experience in this area, with rents and income levels being what they are in DC, combined with the long-term market view (if one were to believe the historical data and housing shortage projections, anyway), the numbers almost always add up to buying.


Co-ops: The Surprising Numbers

I’ve posted here before that I am not a big fan of co-ops, and that’s still true. HOWEVER, I do want to share some data that surprised me, and after I have a chance to do a little more digging, I may reverse my position after all.

I have a client who is very interested in co-ops, so I wanted to try to get some facts to support the potential resale issues; broadly speaking, my impression of co-ops was that they were cheap to get into, but very tough to get out of when it’s time to sell.

I was surprised to find that for the most recent six month period, MLS data showed that in zip code 20009..
Statistic: Condos / Co-ops
Units sold: 156 / 33
Days on Market: 60 / 53
Avg Sold Price: $366,574 / $304,321
Source: Metropolitan Regional Information System

Now, I already knew that the average price of co-ops was much less, and the number of units sold would be much lower, after all, there are many more condos than co-ops in Washington, DC. But, I was certainly surprised by the Days on Market total–turns out co-ops sell just as quickly, if not more quickly, than condos. My guess is that this is because of the low price point–an entry level buyer, and $52K is quite a difference for someone trying to get into their first place. Not to mention that co-ops, often in older buildings, are frequently much larger units than today’s condos.

My point? Perhaps just that I may have been too hasty to condemn co-ops. And there are still major pitfalls for a buyer to be aware of: Board Approval, possibly higher required downpayments, limited options for financing, the potential inability to rent the unit. But for the right purchaser, co-ops could be a great opportunity, and the topic deserves more study and I’ll post again soon.

And now for my legal disclaimer: Information deemed reliable but not guaranteed. Do not rely on this information without verification.


FAQ: What is PMI?

Private Morgage Insurance (PMI) is required by a lender when a buyer has less than 20% or the purchase price as a downpayment (this is where the “I need 20% down” myth originated.) The buyer pays the premium but the lender is actually the one insured. Once the equity in the property reaches 80% (either via paying down the balance or an increase in market value of the property), the buyer can cancel the insurance. (Note: This insurance is NOT the insurance that must be carried on FHA mortgages, often touted as advantageous for first time buyers. FHA loans carry a different type of required insurance that lasts for the life of the loan.)

Prior to 2007, PMI was not tax deductible–just a fee that a homeowner had to pay. This resulted in “piggyback” loans–second mortgages that are tacked on to first mortgages. These second mortgages often carry slightly higher interest rates, but the benefit to the borrower was that the two loans in combination added up to more than 80%, and thus the buyer could replace non-tax-deductibe PMI with tax-deductible interest on the second mortgage. You often see these loans referred to as 80/15/5, or 80/20; the first number is the percent of the purchase price borrowed on the first trust (loan), the second number is the percent borrowed on the second trust, and the third number, if there is one, is the amount of the downpayment.

Starting in 2007, PMI is now fully tax deductible IF you’re income is under $100,000. So far, this applies only to loans closed in 2007, so we’ll have to see if this benefit stays in place. If you qualify for this deduction though, it may be advantageous to take one 95% loan, all at the same, lower interest rate, and pay the PMI, since it’s now tax deductible just like mortgage interest. Everyone’s situation is different, so consult a mortgage lender you trust and ask him to run the scenarios to see which option is more beneficial for you.