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.


4 thoughts on “The Best "Rent vs. Buy" Calculator

  1. I have to give one quick word of warning on this (and any other calculator). They all have an inherent assumption that you will be SAVING or INVESTING the “excess” funds that you would otherwise be paying for a mortgage (e.g., if your rent is $1500 and your mortgage would be $2500, it assumes you invest that extra $1000.) This particular calculator even asks for your expected rate of return on those funds. So if you spend that extra thou on a new flat screen, the analysis will be off!

  2. Interesting calculator. Based on this, if I where to buy the condo I am renting, it would take me 19 years to see a profit. WOW. Guess I should continue to invest the 140K I made on my house in 2006 and continue renting for a while.

  3. Thomas, thanks for posting. No doubt there are times when it pays to rent! Do you mind sharing the assumptions you used (specifically rent, purchase price, and appreciation rate, which are the biggest drivers)?


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