The equilibrium between renting and buying was discussed by the three realtors in the last ‘Shop Talk’ video, and commenters thought we should look into it further.
Doug hangs out in Rancho Santa Fe, where the rent vs. buy comparison is extreme.
Recently there was a house in Rancho Santa Fe that the owner was willing to sell for $1,400,000 that had been rented for $6,900 per month. I used this rent vs. buy calculator because it includes the extra expenses that we should all consider about homeownership:
http://realestate.yahoo.com/calculators/rent_vs_own.html
I used 1% annual appreciation, 20% down payment, 5% mortgage rate, $2,000 annual homeowner’s insurance, $15,000 property taxes, $6,000 annual maintenance, 7-year comparison, 33% tax bracket (should be higher) 1% return on savings, and 2% projected inflation.
Buying came out $138,356 ahead of renting in today’s dollars.
But like livincali pointed out in his comment, the down payment is the sticking point for most. People who pay $6,900 per month in rent have to be thinking about buying, mostly because they need the write-off.
Are there enough higher-end renters that want to put down roots, commit to owning long-term, will take the write-off in trade for the extra expenses like property taxes, insurance and maintenance, and roll the dice on appreciation vs. depreciation that can save up 20% down payments? We’ll see!
Here is the investor cash-flow evaluator featured here previously: http://www.finestexpert.com/
Another buy vs. rent calculator:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
If you’re getting 1% return on savings, you’re not going to have $280K.
Bearer or bad news.
Chuck Ponzi
Thank you for including more details on the kind of deals you have in mind as working out in the rent vs. buy calculation.
I agree with you on the trend rents are going up and prices have come down, but I don’t think that it is in no-brainer, clearly “time to buy,” at least in the prime areas.
I’d say it’s possible, with some hard work, to find a deal that might work out. There are caveats.
Here in your calculation you are assuming that the current very low return on savings and very low inflation are going to continue for the next 7 years.
That is a big assumption.
I don’t mean that as a criticism – the nature of making this calculation requires projections about the future.
Here,although you mentioned that some people might have difficulty saving up a down payment, as a sticking point, I think it is a sticking point even for those who manage to save up $200K because of the “uncertainty” you have mentioned on other threads.
There is a greater appreciation for risk after what we have been through (and are going through). If I have done the hard work of saving up $200,000 for a down payment, what is the best use I can put that money toward for the next 10,15,or 20 years? It really depends on my particular circumstances almost as much as my predictions about the macro economy – will I have to/want to move, how close am I to retirement – will I need income from my down payment over X time period, or can I just put the money down and forget about it?
Setting aside reservations about projected inflation and the opportunity cost, what about the lack of liquidity? Big investors with tens or hundreds of properties don’t have the same concern as a family purchasing a primary residence…200K is a lot of eggs in one basket even for most people in the top 3% of income.
I prefer the New York Times rent versus buy calculator because it allows you to include your expectations about increases in rent and the price of the home.
The more I tweak the parameters on the calculator, the more I realize that I can have a very large margin of error (doubling the break even time) even on the same rent and purchase price deal.
One more note about projections. While I think that Jim’s prediction regarding an increase in rents of 10% over the next year is a reasonable one, I doubt he thinks that that is a long-term trend (unless he thinks that wages are set to increase proportionally.) There is a historic relationship between the price of houses and rent that was way out of wack during the bubble and is now in line with historical norms for San Diego. But there is also a historical relationship between income and rent…it’s pretty high ratio in San Diego, and will continue to be so, but there is a limit to how high it can go – there isn’t any leverage out there (although I suppose you could use your credit cards to pay rent for a short time).
I appreciate this topic and look forward to any analysis you have on rents or any of the factors going into people’s decision to rent vs. buy in today’s market.
I appreciate the struggle that analytical folks have in trying to have homebuying make sense.
I think that the people who are actually buying homes today are the ones leaving the calculator at home.
Those who will buy if/when we reach historical norms are waiting, and the families who need a write-off and want to settle down are buying.
The rest is fodder for guys like Chuck to spit back at me.
Well, you can’t buy an aggregate house or a historical norm (nor can you rent one).
If you are like me, you are just looking for the right place in a prime location that is going to leave you better off financially than if you had rented something very similar.
I don’t understand why the “need” for a write off is anything other than a financial consideration that favors buying over renting…so are these families being “analytical.”
The desire to “settle-down,” well, you got me there.
I wonder if high end renters are the source of many buyers of similar homes. My experience has been most high end renters are not buyers, but folks that are located somewhere temporarily and are used to quality locations. A few want the lifestyle and address but can’t afford to buy. They put a high proportion of their income towards rent to get to live in the top areas.
Most buyers in high end neighborhoods in my experience are either moving up because of business or career success or are coming in from high end areas in other parts of the country. It would be interesting to ask the agent that specializes in RSF how many of his buyers are converted from renting in the same area.
For me even if the RvB calculation doesn’t work out I HAVE to buy because the things I want to do I can not do with a rental (improvements etc)
But generally speaking the RVB ratio of 2006 PREVENTED me from buying. No way was I going to buy at those RvB levels. But now the RvB ratio ALLOWS me to buy, even though it may not make pure mathmatical sense.