- Bargaineering - http://www.bargaineering.com/articles -
That Damned Rent vs. Buy Question
Posted By Jim On 04/12/2005 @ 11:53 am In The Home | 31 Comments
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:
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.
Article printed from Bargaineering: http://www.bargaineering.com/articles
URL to article: http://www.bargaineering.com/articles/that-damned-rent-vs-buy-question.html
URLs in this post:
 Tweet: http://twitter.com/share
 Email: mailto:?subject=http://www.bargaineering.com/articles/that-damned-rent-vs-buy-question.html
 link: http://www.dinkytown.net/java/MortgageRentvsBuy.html
Thank you for reading!