Deciding Whether to Rent or Buy a Home

The investment analysis behind the decision to rent vs buy a home is surprisingly complex and requires clear thinking on a number of key assumptions. These are in green in the table and can be changed from the base case by the user.
  • Monthly rental for house or comparable apartment
  • Sales price of the house including closing costs such as points
  • Ratio of downpayment to price
  • Expected annual appreciation of house not counting inflation (actual rate for the period 1999-2018 = .021)
  • Mortgage interest rate
  • Federal and state marginal tax bracket
  • Property tax and maintenance costs as a ratio of price
  • Opportunity cost of downpayment not counting inflation (actual annual return of the S&P500 for the period 1999-2018 = .033)
The results are the respective costs for a 5 and 15 year period of home ownership. The example shows a breakeven case for a 5 year period.
Description of column headings in the table:
  • rent is annualized monthly rental
  • npcost is rental discounted for the opportunity cost of capital
  • mtgbal is the balance of mortgage as a result of principal payments
  • int,princ are the components of the mortgage payment each year
  • maint and proptax are the respective input rates times house price
  • taxsav is the effect of deducting interest and property tax at the marginal tax rate
  • invest in year 1 is the downpayment; in the final year, sale of the house at its appreciated value less the mortgage balance
  • net cash is the sum of the prior 6 columns
  • npcost is the net cash discounted for the opportunity cost of capital

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