The renting vs. buying debate is pumped full of anecdotes, opinions, and a lot of noise. Typically, people tend to make blanket statements about how buying is the winner’s game and renting is the loser’s game. With some simple mathematics and analysis, I’ll demonstrate why buying a home isn’t always the correct choice and how we will save $13,000 over 5 years by renting rather than buying.
Why We Rent
We rent our home out of choice. We do it because it saves us more money than purchasing our home. That is because we do not plan to live where we are for more than 5 years.
From our research, we know our landlord bought our current unit for $309,000 in 2012. So to keep things simple, I will work with this number. Here is what a buying vs. renting scenario looks like for us:
The chart highlights how much renting vs. buying our home would cost per month. It is a simple look at the expenses. It does not go into every expense associated with either renting or buying.
$1877.09 – $1175 = a difference of $702.09 per month
It would be $702.09 more expensive each month to own our place versus buying it. Now, you may be thinking “but Steve, when you purchase your own home, you build equity and don’t piss away your money to your landlord.” Perhaps. But let’s analyze this a bit further.
Down Payment or Investment?
Let’s say we start with $50,000 built up for either a down payment in a home purchase scenario or to save and invest in a home renting scenario.
In the home purchase scenario, the $50,000 would be used as a down payment and you would end up with $50,000 in equity in your home. Let’s keep it simple and say your home appreciates by 2% annually.
In the home renting scenario, you would take the $50,000 and place it in a savings or investment account. You would also take the $702.09 difference between renting and buying and also place that in your savings or investment account each month. Let’s keep it simple and say your savings or investment account yields 2% annually.
What’s the verdict? We need to do the math to figure that out.
Home Purchase Scenario
These are our assumptions:
a) $50,000 is used as a down payment
b) the home appreciates by 2% annually
c) over the 25 year lifetime of the mortgage, the interest rate will average 5%
d) the mortgage payments consist solely of regular payments for 25 years, no extra payments
Get Rich Slowly has a great little mortgage calculator where you can plug in the numbers to see your mortgage payments. These are the numbers that are pumped out for a $259,000 mortgage at 5% for 25 years:
In 5 years, $29,577.31 in principle payments would have been made. Add that to the $50,000 in equity you already have and you have $79,577.31 built up in in equity after 5 years.
But wait, it has also appreciated by 2% annually over 5 years. Let’s keep it super simple with the math:
$86,542.06 would roughly be the equity built up in the home after 5 years. Now, we need to compare that total with what investing the down payment and difference each month will yield us.
Home Renting Scenario
These are our assumptions:
a) $50,000 placed in a savings or investing account
b) the $50,000 appreciated by 2% annually
c) there will be no fluctuation in the interest earned, it will be 2% annually
d) the $702.09 difference between renting and buying will be placed in the account every month
ING has a great little investment calculator, these are the numbers:
We would have saved $99,586.96 after 5 years of savings at 2% annually.
Renting over 5 years was financially superior to owning for 5 years. Here is the math:
$99,586.96 (home renting scenario) – $86,542.06 (home purchase scenario)
= $13,044.90 Difference
Renting, in our personal situation, will yield us $13,044.90 more over a 5 year period. This is why renting makes sense. This is why it is nonsense when people try to make blanket statements about renting as a loser’s game. That is why we rent. Now.
The Small Print
Of course these are all very rough numbers. And it is an example based on a unique situation: ours. Even if the numbers were a wash between renting and buying, we would still prefer to rent over this time period. There would be no hassle to buy and sell. There would be no real estate agents taking their cut from the purchase and sale. There would be no need for maintenance. There would be no need to pay property taxes or strata fees.
In the end, living in a home, be it renting or buying, comes down to a lifestyle choice. We are not against purchasing a home. On the contrary, we would like to own a home someday.
It’s just that now, we enjoy the lifestyle choice of renting. And in the future, we want the lifestyle choice of owning our own home. You just have to use some common sense and basic math to figure out what may be a better financial situation for you. Yes, for you.
Don’t get sucked into the propaganda that is perpetuated every day about how superior buying your home is over renting. Don’t let societal pressures, a desire to keep up with the Jones’, and emotional marketing manipulate your decision. That should be a choice that you make based on facts, numbers, and your unique situation.
There is a great excel spreadsheet that provides a great way to calculate complex rent vs. buy scenarios. It is not a spreadsheet I have made. It was made by Gummy over at Gummy Stuff. Gummy has an amazing array of spreadsheets.
This is the rent vs. buy spreadsheet by Gummy: Rent VS Buy Gummy Stuff
Can you tell my academic habits won’t die with these footnotes? Anyways, Mr. Money Mustache had a great article on buying your home so I thought I would include the link.