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That Damned Rent vs. Buy Question

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I’m looking for a townhouse and prices are downright ridiculous. I’ve narrowed down what I’m looking for in a house to a 3 bedroom, 2+ bathroom townhouse in the $260k – $320k range in a relatively nice area south of Baltimore, MD. I can rent an apartment for approximately $1,000 (most likely less than that because of promotions and the like) and so after reading a whole bunch of gibberish online, I’ve resorted to using a couple freely available calculators to see what the best option for me is.

If you haven’t heard of DinkyTown.net (it’s one helluva name), then let me introduce you to the best collection of free financial calculators ever. Pop your head over to this link and you’ll find the little app I used to make these calculations.

Here are the results:
Rent versus Buy Comparison Chart

The numbers used in the analysis are up for debate but I thought a ballpark figure was enough for me to get a good idea of what I’d be getting into. According to the figures I supplied, the breakeven point is 8.2 years. Over eight years until owning the house would have been better than renting! That doesn’t sound like a long time but for someone in their twenties, it’s about a third of their life so far… that puts owning a house in that gray area where I won’t know my plans in 8.2 years.

So why are all these twenty-something’s snatching up houses? The key is in the appreciation rate of the house. I put 3% in the analysis above but if I were to increase it to 6%, the breakeven point is 2.3 years. 2.3 years is a great time frame because I probably plan on living in that home at least five years. Is 6% reasonable? That depends on whether you think we’re in a housing bubble.

I think a bubble exists in areas of Baltimore where homes that were around $10k-$50k two years ago now command north of $350k after being gutted and redone. A lot of those prices are based on buyers who believe the “area will get better,” something I hope, for their sake, happens. If it doesn’t, then you now own a very home in a very rough area… making it difficult to sell. Now, in the suburban areas south and west of the city, where I’m looking, we’re talking about homes that commanded $200k last year now commanding around $300k. I would say a bubble also exists in the areas I’m looking but a significantly smaller bubble. I feel as though the risk is far less in these suburban areas because as a buyer I’m not buying into an area that’s bad but will get better, I’m buying into an area that’s already decent.

Regardless, a 6% appreciate rate seems somewhat reasonable for a home so I think a 2.3 years break-even point is something I can make a decision on. I played with a few of the other numbers, like term of the loan (going to 30 years hardly affects break-even point but drops the monthly payment by $700ish), and none of the other factors seemed to make a big difference. So, now I just need to find a townhouse that I like and I can afford.

{ 31 comments, please add your thoughts now! }

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31 Responses to “That Damned Rent vs. Buy Question”

  1. Jason says:

    Also keep in mind that buying a house is a life-style decision. Owning is quite a bit different than renting – I would not presume to say it is better or worse – that is up to you. (full disclosure – I own and would never rent again) My point being, though it certainly is a huge financial decision with financial repercussions for many years to come, it is not JUST a financial decision. So many factors are not quantifiable: pride of ownership with owning, ease of calling the landlord when something breaks when renting, ….

  2. jim says:

    That’s a very good and important point, one I haven’t overlooked. The first and easiest thing to quantify and analyze are the financials, which is why I checked some of it out first. I think the pride of ownership will be significant for me.

  3. Tim says:

    3% is more reasonable for closing costs. I know you were going for ballpark figures but little things add up and the costs add up that you don’t really plan on…so always add some margin into the mix…

  4. risk says:

    I’m in the same area. looking in the same range of townhouses as you do. $260k to $320k budget is very tight to get a good-looking townhouse in Howard county. I haven’t bought any because I could not find anything good with that buget. I also wonder whether a $1000 rent is comparable, from my estimate, shall in the range of $1200 to be fair

  5. jim says:

    Oh really? Yeah, everything seems to be in that $300k-$320k range huh? I put in an offer today on a property… maybe I get it, maybe I don’t. If I do, I’ll just have to deal with buyer’s remorse and wondering if I offered too much. :)

    Drop me an email if you have the change, jim at bargaineering.com

  6. risk says:

    maybe I’m too greedy… I want a garaged townhouse under 320k… I’d like southern exposure too. With all the new deveopments in the city, I wonder how city living may work out for me (single no kids). btw, I know a lender with much less closing fees, but swallowed since it’s not a local credit union that you wanna buddy up with

    let me know how you bidding goes. I don’t know nowadays whether the bid winner is offering at or above the asking price. I hope it’s below, but that may just be my wishful thinking

  7. jim says:

    Allegedly a garage commands a premium of like another $20k according to my agent (that might be high, my memory’s not good). I thought about the city, like a Federal Hill area, but my girlfriend isn’t too high on it because of the crime factor. What’s the lender with less closing fees? The buddy up factor isn’t huge, just something I thought was interesting.

    Allegedly I’ll hear today what the deal is with my offer… nowadays, at least in the Columbia area, the winner has offered more than the asking price (5k). I’ve had a friend who bid on a single family home last November who lost his first offer by nearly $30k…

  8. risk says:

    I like canton more. would be great if it’s between park and water but closer to the park. City’s taxes are much higher. Just take closing for example, it’s 1.5% and 1% (plus the state transfer tax but first time home buyer is waived). Higher premium in auto insurance too :(

    let me know what happen to your bid. The lender is great if you do settle with them because they refund a lot of fees. say appraisal, flood, credit report, etc. No Processing Fee, Underwriting Fee or
    Application Fee.

    but if you don’t settle, you need to pay the fees they incurred. Their rate is decent too. just checked, if you’re going conventional, as I see here, 30 yr fixed, 1st is 5.75 with a quarter of a point and 5.875 with no point. the 2nd, if you do 80-10-10 is 15yr fixed 5.99%.

  9. jim says:

    My agent told me that the seller agent and the seller are getting together tonight to “ratify” (legalese for accept) one of the offers. I’m honestly hoping for them to pick another one because today I started looking more and there are comparable homes (at least visually on the outside) selling for $20k less in marginally worse neighborhoods. I think I’m in a win-win situation in terms of happiness anyway. :)

    What’s the name of that lender? I’m curious… and if you can get anything for referring me, by all means let me know how I can hook you up. The rates seem very competitive.

  10. Brian says:

    Jim- One thing I often see left out of the bubble/boom question is a more realisitic (at least in my view) middle-ground: I think a lot of areas will experience a flat price stagnation as incomes catch up to housing prices over the next 3-5 years. I don’t know specifically about your area, but I live in Minneapolis, where the general consensus is we are ~10% overvalued, and it appears that home prices have started to stagnate. Just my $0.02 and by no means an expert opinion, just another scenario. I do believe, as the 1st responder pointed out, the value of owning a home has a lot to do with the non-financial issues. A primary home should be looked as a valuable asset for your mental health first and your financial health second. Now a good appreciation rate doesn’t hurt your mental health….. :-)

  11. Jonathan says:

    I remember using one of these calculators and came up with the exact same conclusion as you – it all depends on how much the house will appreciate. I don’t necessariliy think that there is a housing bubble in my area, but I do think it will definitely taper off as interest rates will probably rise a LOT in 3 years. Tough decision (I’m currently renting as well)…

    Jonathan@MyMoneyBlog

  12. Jonathan says:

    Oh, and thanks for the link and good luck!

  13. MyMoneyBlog says:

    The eternal question: Rent vs. Buy?

    At least for me it is. Jim from Blueprint for Financial Prosperity lays down his results in this interesting article. Looks like he’s going for it! He also introduced me to Dinkytown.net, home of tons of neat financial calculators. I remember running …

  14. frugal says:

    Yeah, after I entered your numbers into my own calculator on my website at http://www.1stMillionAt33.com/java_codes/rent_buy.html. I got a break-even number of some 8 years too. My java calculator gives you a table of how different things such as tax benefit and mortgage balance evolved over the years of home ownership. I find that more helpful to visualize how rent vs buy is better.
    I think the biggest question is still how much homes will appreciate. If one can believe that homes can appreciate 6% year after year, then one should believe that the salary in general can increase close to 6% year after year too. With outsourcing in this global economy, I think that may be a little bit difficult to achieve.

  15. PK says:

    Great article!
    A little backstory on Dinkytown.net. It’s a local company for me here in the Minneapolis area, and Dinkytown (www.dinkytownusa.com) is a local neighborhood by the U of MN campus. I’m sure that’s where the name came from.

  16. MinniRenter says:

    Jim, one other thing to consider (that the calculator does not take into account) when you sell the house you have to pay a 4-6% commission to a realtor, in essence, your break even point would be pushed out further.

  17. Nancy says:

    Some of this has to be a factor of age and also geographic location. I am near retirement and have had spinal issues and am married to a workaholic who will never retire. For us living in the heart of DC in the N.W. section as renters is a dream. I have a doorman, concierge service and a Meto stop two blocks away. My rent is fair, not great but we were able to sell two cars and have saved a fortune there. If we had a house the money spent just to keep it up would kill us plus add yard/lawn service as my husband is getting just a bit too old to do it himself and for us it is a bargain both finacially and convenience wise. When I had four kids at home it was a different story!

  18. Julie Stroeve says:

    Mortgage payments are 2x higher than rent payments. BUT rent is money thrown away…ownership is money invested. If I spent $1500 on rent in Minneapolis, I would pay 25% income tax and have no deductions from there! Mpls mortgage payments, property tax and utilities are outrageous relative to income, but at the end of the year I don’t pay income tax. Will we get to 10% individual and corporate income tax — no deductions? We’ll see. But for now the only way I can keep my money while being house poor at the end of the year is to own my home. If I paid equivalent $ in rent versus mortgage, I’d still be house poor and have no more money in the bank. If I had $100,000 in the bank, I wouldn’t worry about mortgages OR rent payments. I buy my home for the long term. I rent for the short term.

  19. Jeffrey says:

    The truth is until you make the last mortgage payment, the Bank owns the House. You are in the same boat as the renter, no pay, you lose!!.
    Meanwhile the bank makes 80% of thier interest in the first 20% of an average loan. You move up, you risk it all on market conditions.
    Figure that the average family owns a house for 7 years then moves, Lets see who wins!!!
    You can easily figure that what ever you finance your house for the bank makes 2.5 or 3 times that price in interest.

  20. joe s says:

    add repairs and replacement costs roof,appliances,heater,huge property and school taxes. my calculations say renting is by far and away the better bargain even with home appreciation.maybe years ago home ownership was cheaper it was a good value.plug in all your costs over 10 to 20 years and see how much money you really made on your house.

  21. wafireman says:

    you see what you people dont take into consideration is this if mortgage is 2400 and rent is 1100, if you take that difference(1300) and invest it in even a simple ira, you will come out ahead of any equity you will ever be getting by buying, plus you save on property tax, upkeep, and realator fees. just putting it in savings would equal out to this, say you buy a house for 300,000 and pay it off in 30 years and it has appreciated to 450,000, now you have also paid interest on your loan, upkeep and taxes so it would be fair to say that you would be into it 450,000. if you just took the difference you saved by renting and put it in savings for 30 years it would be $468,000. Seems like simple math to me.

    • Zeke says:

      wafireman

      You are 100% accurate. Nothing wrong with owning a home, but let’s not give it the “investment” label. Home equity is dead money, it builds over time with no simple or free way to access it.
      Real estate is very slow, real appreciation may be a decade plus away. If you look over the longer term, the vast majority of real estate gains have been made in 2 huge bubbles

      If you want the best financial decision, rent, invest the difference. If it’s your desire to own a home,go for it, just don’t expect it to be an investment

  22. Matt says:

    If you can’t rent your place and cover your ownership costs….you are paying too much.

    If and when Govt’t stops bailing everyone out….tax breaks, low interest…prices will have a lot of downward pressure for the next decade.

    I believe renting is a safer bet.

  23. Nancy says:

    I think the days of looking at your home as a piggybank are gone. Unemployment is expected to return very slowly and even when it does many will be nervous about the potential of going through that again. Those that are employed are worried if they will have a job in this global economy where China seems to be taking the lead. Add in the fact that 25% of mortgages are “underwater” where more is owed than the value of the home please use caution before jumping in. I think the “market” for real estate is more emotional than based on facts. Remember when those folks felt on top of the world and were “flipping”??? None of us can predict what tomorrow will bring. Another 9/11, China pulling back on lending or some other crisis we could have never predicted and things change overnight. My best to all of you no matter which direction you decide to go!

  24. halfpint says:

    This is good data. I own a condo. Due to overbuilding in my city-there is a condo surplus. I am relocating and cannot decide if I should sell the condo and “be free” or rent it out, hoping for the 6% appreciation. Right now, with mortgage and costs I would NOT have enough to put down on a new home. However with the going rent rate, I would net -300 each month (includes mortgage and HOA dues). If I wait 2 to 3 years the value “might” go back up to where I would net enough to buy another home. Oh decisions…. Am I missing any considerations?

    • Nancy says:

      Since you are relocating out of the area do you have an individual who will be there for your renter if something should go wrong like appliance or plumbing issues? Also consider if you do rent your place, unless the renter is a friend, you may not find your place in the same condition it was when you left. Often a security deposit does not even begin to handle the repairs that need to be done. 6% appreciation seems to be a number that is thrown out but has very little statistical backing. The stock market has been fairly good but employment and general growth is still a wild card in my opinion. Best of luck in your new location.

  25. Cvan says:

    There’s a good link for calculating the same thing at http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=1.

    Problem, is, if you get sick, lose your job, or something happens, all those numbers don’t stick and you’ll owe a lot of money for a house on top of the emergency. Quick slide to huge problems. Given the situation right now, I’d imagine it would be best to freeze in your position for a couple of more years. If you’re in stick it out, if you’re out pack away the difference plus interest.

    If the interest rate goes up while I wait, plus the price of the home, I would be able to earn a higher credit score in the meantime, put the difference toward a larger down payment it and break even. Still got a couple of more years for the resets to occur, who knows how many more will be foreclosed.

    Do you think it’s over when you buy the house? You’ll probably need to furnish it, if you’re picky you’ll tear stuff out and redo it. Things will break, and don’t expect things to get done for less than 1-2k per pop. One simple roofing job will set you back 10k easily. What if your foundation starts to sink?

    They don’t mention how much more it costs to heat/cool/water/gas/electrify all the stuff compared to an apartment. The occasional $50 bag of fertilizer, $200 garbage disposal, HOA restrictions and fines for everything from leaving the trash can by the sidewalk or height of the grass.

    No one advertises to make the highest down payment possible, or even pay the whole thing in cash. It would be stupid for all involved in selling, as the cash magically created from nowhere as interest can go to their accounts. They just focus on people getting in as quickly as possible to feel “normal”.

    • Nancy says:

      Excellent post. The cost of home ownership is more than the mortgage. If you have a secure job that can handle adjustments in the economy and you feel you are secure than do it. If you are just beginning wait and see what happens. There really is no rush. “Normal” as Cvan puts it can change in a moment. Based on research in global events(my day job) we are far from the end of this so called “recession”. The are multiple factor at play. Frankly these days be grateful to have a roof over your head. So many don’t and if they do 25% are underwater which I imagine is not a good feeling.


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