Thursday, July 2, 2009

Googled: "Rent versus Own"

So I googled "rent versus own" and it came up with a bunch of calculators to help someone decide which to do. I decided to try each of them using the following factors: paying rent at $1,500/mo. versus buying something for $300,000 with 10% down (along with other assumptions).

The first calculator I tried was because it came up first on the search. I spent the most time playing with this calculator since I was fresh and not easily bored. The thing I like about this calculator is that information is entered on the same page as the results, making it easy to go back and forth and see how certain numbers change the result. But there were some drawbacks. For example, I was trying to figure out how it calculated everything (which is a drawback in and of itself as the answer is not very intuitive). I learned very quickly that many of the fields did not effect the calculation at all. So don't waste your time putting taxes, maintenance, insurance, or loan cost into the calculator since, as far as I could tell, none of these changed the results. For comparison purposes, therefore, you should not factor in rental insurance since home owner's insurance was not considered in the calculation. Another issue I had was that I could not determine how 'equity appreciation' was calculated.

Next I tried I liked this one better. Unlike the previous site, I could determine how 'equity appreciation' was calculated and all the levers seemed to work if I changed them. It also considers inflation which the other calculator does not. In addition, the answer is laid out so you can see how each number you input influences the outcome. Finally, it has a simple graphic comparison and information on a year by year basis. was the next site I tried which I liked, mainly because it was simple. Unlike the previous two calculators, this one only asked for five inputs and then made assumptions on the rest (all which seemed reasonable to me). While I thought this was beneficial, I could see some people disliking it since if you disagreed with the assumptions you would be powerless to change them. The answer was laid out well so you could easily determine how everything was calculated.

Other useful information was found on Ginnie Mae's website, While I did not review the calculator, I liked the simple table that compared paying $800/month in rent versus a $1,000/month mortgage.

A weakness I see in all these calculators, including the table on Ginnie Mae’s website, is the reliability of the tax savings figures. Without going into too much detail (full disclosure: I was a tax consultant in a former life), the determination of whether the renter/buyer is single or married greatly effects the tax savings calculation, especially on a lower end purchase. This is simply because Itemized Deductions only save on taxes for the amount that they exceed the Standard Deduction, which in 2008 were $5,450 if you were single and $10,900 if you were married.

After reviewing all these calculators, it made one thing clear: assuming the decision between renting and owning comes down to dollar and cents (as oppose to other factors as ease of moving, control of decor, etc.), the major difference in the cost or renting versus owning is the possibility of appreciation/depreciation. In other words, assuming that there is no appreciation or depreciation, then it basically comes down to what your monthly payment is. Thus, in that scenario if you pay $1,500 to rent, then that is better than paying $1,501 to own. As I am saying this, I realize this is a vast simplification and I should stress that I am not suggesting one should rent or one should buy, all I am doing is reiterating that when it comes down to purely money without appreciation renting and owning are on pretty even ground.


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