Rent vs Buy, when buying with cash?

[scott.bouma]

Hi all!  First time poster.  My question is about how the "rent vs buy" equation changes when buying with cash.  We're looking at buying a $250000 house with cash, or renting an equivalent house in the same neighborhood for $1500/mo, leaving the cash free for other investments.

I've found tons of calculators and blogs online talking about "rent vs buy" but every single one of them has assumed "buy with mortgage".  Does anyone know of a resource out there which specifically compares "rent vs buy" when "buy" means "buy with cash".

Thanks!

[lhamo]

$1500 month * 12 months = $18000/year on rent.

That's 7.2% of $250k annually.  Do you think your investments could reliably return more than that per year given the ups and downs of the market?  If not then it is probably worth it to buy.

Of course you will also have property taxes, maintenance, etc. on a purchase.  But most likely the house will continue to appreciate.  And rents would continue to go up, likely at a faster rate than your taxes.

[dandarc]

Rent is quite low relative to purchase price, so I'd be giving renting a hard look.

If you do decide to buy (a long-term play, obviously), rates are crazy low if you're in the US - see the don't pay off your mortage thread. 30 year fixed rate at 3% or less is available in the US right now. You could have your house + $200K working for you.

[JLee]

$1500 month * 12 months = $18000/year on rent.

That's 7.2% of $250k annually.  Do you think your investments could reliably return more than that per year given the ups and downs of the market?  If not then it is probably worth it to buy.

Of course you will also have property taxes, maintenance, etc. on a purchase.  But most likely the house will continue to appreciate.  And rents would continue to go up, likely at a faster rate than your taxes.

That is assuming you never sell the house, which is rarely the case. Transaction costs for house sales are significant.

[scott.bouma]

Thanks all!  Great perspectives; @dandarc that's what we're leaning towards right now: 50k down and invest the other 200k.

[RWD]

The NY Times Rent vs Buy calculator allows you to set the down payment to 100% which is equivalent to buying with cash. You can then also adjust the closing cost assumptions accordingly. Lots of variables you can play with in that calculator.

[SimpleCycle]

The NY Times Rent vs Buy calculator allows you to set the down payment to 100% which is equivalent to buying with cash. You can then also adjust the closing cost assumptions accordingly. Lots of variables you can play with in that calculator.

Do you know if this calculator has been updated post-TCJA?  I believe it doesn't play nicely with the SALT cap by assuming 100% of property taxes and 100% of mortgage interest are deductible and will be deducted.  I used to refer people to this calculator all the time, but I think post-TCJA it's not as useful.

[SimpleCycle]

To answer the question, the traditional rent vs. buy equation is tilted more toward renting if you plan to buy with cash, due to the opportunity cost of tying up your cash vs. keeping it invested.  This is accounted for in good calculators like the NYTimes one.

[scott.bouma]

@SimpleCycle YES! That's the feeling I got when I did the numbers but I couldn't find anything online doing that comparison.  This NYT calculator that @RWD posted is great; I understand there are always assumptions/unique circumstances but I had to laugh when I put in my numbers and came out almost exactly at the $1500 mark for suggested rent.

[RWD]

The NY Times Rent vs Buy calculator allows you to set the down payment to 100% which is equivalent to buying with cash. You can then also adjust the closing cost assumptions accordingly. Lots of variables you can play with in that calculator.

Do you know if this calculator has been updated post-TCJA?  I believe it doesn't play nicely with the SALT cap by assuming 100% of property taxes and 100% of mortgage interest are deductible and will be deducted.  I used to refer people to this calculator all the time, but I think post-TCJA it's not as useful.

I don't think it's been updated but the deductible mortgage interest variable has always been a bit broken (because it didn't know the rest of your itemized deductions). Still I think by playing around with the variables you can emulate your personal situation fairly closely if you know what you're doing.