A while ago, I came across this rent-or-buy calculator. After playing around with it for a while, I learned two things: (1) I didn’t really understand what it was trying to display, and (2) the buying/renting distinction was more subtle than I thought. So, let me work through this…

#### Option 1: Buy

Let’s buy a $400,000 home. Let’s say we get together a $50,000 down payment and mortgage $350,000.

At the moment, the banks’ best lending rates are 6.25% on variable rate mortgages. Let’s assume (foolishly) that that will not increase over a 20 year mortgage. A mortgage calculator says that the monthly payment will be $2,542.

So, after 20 years, we own our home. Apparently, home prices don’t really increase that much, on average in the long-term. (I suspect the problem here is that after 20 years, your house is 20 years older, thus less desirable to potential buyers. It’s not relevant to compare new-home prices.) Let’s say the home appreciates at 2% after inflation. At the end of the mortgage, a compound interest calculator says that our home will be worth $594,379.

#### Option 2: Rent

Let’s use the mortgage payment of $2,542 per month. We rent a place for $1,500 (which should be comparable to what we could buy for $400k at the moment), and invest the other $1042. Start the investment account off with the $50,000 down-payment.

Like in my last money-related post, I’ll use 6% after inflation as the rate of return and an investment calculator gives us $649,364 after 20 years. A net worth of $55k more than if we had bought.

#### Notes

- Option 1 ignores property taxes, fees, and maintenance. Strata fees in particular are going to really add up if you’re buying a condo.
- In option 1, you might do really well if housing prices go up dramatically. Or you might get screwed. Basically, the problem is that you have a horribly diversified portfolio. You have one thing, your house, and are very susceptible to market fluctuations.
- Option 1 doesn’t take into account any improvements made that would increase the value of the house. It doesn’t count the cost of those improvements either.
- A home is about the least-liquid asset you can have. It may be worth $600k, but you have to sell it (and thus start renting) to get at that capital.
- After the 20 years, you’re definitely still paying rent in option 2.
**Option 2 assumes the discipline to invest**without the threat of the bank breaking your kneecaps.- There are probably some tax implications of buying that I don’t know about.
- There are any number of possibly-invalid assumptions there, but I’ve tried to hit a reasonable balance (except that thing about interest rates never going up: that’s nuts). The calculations are particularly sensitive to changes in the interest/return rates.

#### So…

I don’t know, really. I just needed to work an example through. I guess the message is that buying a home isn’t the be-all and end-all of investing.

We can rent, invest, and relax.

August 31st, 2007 at 4:38 am

I think one possible invalis assumption is that rent on a place that’s $400,000 is $1500 a month. Take our old place on Pender. That place would probably sell for around $400K. However, we were already paying $1150 on JUST the basement. To rent the entire house (or the an equivalent ENTIRE $400,000 home) would probably be more like $2000 to $2500 a month. Either that, or you factor into the cost of the house that you could rent a basement suite and get some income that way. You have to make renting and buying totally equivalent, and not just factor in rent for the portion of the house that we currently live in. It would be the entire house, because if we bought the house, we’d have the whole thing.

September 1st, 2007 at 9:25 pm

Yeah, I guess I was thinking about a condo or townhouse when I was writing that. If the object is a detached home where a basement suite can be rented, the pendulum definitely swings for buying.

September 29th, 2007 at 11:20 am

Option 2 does have the added bonus of never actually being in mortgage debt ðŸ˜› I guess that falls under the “relax” bit.

January 23rd, 2008 at 5:23 pm

[…] while ago, I posted a calculation that I had done on renting a home vs buying one. Those calculations have been intriguing me ever since. I have had […]