Buy house or rent? This is a question I’ve spent a good deal of time researching and pondering for the last couple of years. I’ve concluded that, for my circumstances 1, it is time to trade-in the joys of homeownership, rent for a few years and take advantage of the falling housing market to search out a downsized home or condo.

My decision was not easy to arrive at. The financial analysis piece – though very complex -was made manageable by the great tool discussed below. But the non-financial considerations were even more important in reaching a final decision. The decision to rent or buy is very personal and other people weighing factors similar to mine could easily reach a different conclusion. Regardless, my experiences and thoughts may be helpful to others working their way through the buy house or rent quandary.

Buy House or Rent: Financial Analysis

There are a lot of free “rent or buy” calculators and analysis tools available on the internet. The NY Times Is It Better to Buy or Rent? calculator is far and away the most sophisticated and comprehensive tool I have come across. The calculator categorizes and weighs a wide range of relevant cost factors:

Key Cost Factors in BuyingKey Cost Factors in Renting
Purchase costs are the costs you incur when you go to the closing for the home you are purchasing. This includes the down payment and typical closing costs.Initial costs are the rent security deposit and, if applicable, the broker’s fee.
Yearly costs are recurring monthly or yearly expenses. These include mortgage payments, condo fees (or other community living fees), renovation costs, maintenance costs, property taxes and homeowner’s insurance.Yearly costs are the monthly rent and the cost of renter’s insurance.
Lost opportunity costs are tracked for the initial purchase costs and for the yearly costs. The former will give you an idea of how much you could have made if you had invested the down payment instead of buying your home.Lost opportunity costs are calculated each year for both your initial costs and your yearly costs.
Selling costs are the costs you incur when you go to the closing for the home you are selling. This includes the broker’s commission and other fees, as well as the remaining principal balance that you pay to your mortgage bank.Leaving your rental is equal to the rent security deposit, typically returned to a renter at the end of a lease.

NY Times Rent or Buy Calculator Methodology:
The calculator keeps a running tally of the most common expenses of owning and renting. It also takes into account something known as lost opportunity costs — for example, the return you could have earned by investing your money instead of spending it on a down payment. The calculator assumes that the profit you would have made in your investments would be taxed as long-term capital gains and adjusts the bottom line accordingly. The calculator tabulates lost opportunity costs for all parts of the buying and renting scenarios.

Importantly, the NY Time’s rent or buy calculator easily handles complex but critical factors – like opportunity costs, income tax issues, and time horizon – that would make a thorough paper & pencil analysis of the issue next to impossible.

Time horizon – how long you plan to own or rent – is the most important consideration. Typically, shorter time horizons favor renting. Then, there is a break-even point after which homeownership is the more financially prudent route. Of course, the analysis is dynamic and ever-changing depending on the information you input.

buy house or rent calculator results

Summary results page from The New York Times rent or buy calculator (click image for larger view). This is a very powerful tool that will provide you with a comprehensive analysis based on the financial inputs you provide.

The NYT calculator beautifully displays how time horizon impacts rent or buy financials. You can even adjust the variables on the fly and see an immediate graphical representation their impact on the overall rent or buy financial picture.

In my case, after honing the financial inputs as best I could, the calculator showed that it made sense to rent for a period of nine years or less; for time horizons beyond nine years, buying was the better financial decision. Since my plan is to sell my large home (it is currently under contract), rent for 2-4 years and seek out a suitable downsized home in a falling market, the calculator was invaluable in helping me cost out alternative scenarios.

I highly recommend that anyone contemplating whether to buy or rent check out this free calculator. The quality of information you will get is easily comparable to that in a consultant’s report that you might pay several hundred dollars for.

With this information in hand, you can begin analyzing the more subjective issues involved in the buy house or rent decision.

  1. My circumstances: mid-50′s baby-boomer, relatively secure, have owned same home for more than 20 years, tired of home maintenance chores, looking for more freedom and flexibility [↩]

Filed under: Personal Finance

Like this post? Subscribe to my RSS feed and get loads more!