Renting vs. buying a house.

[dreampreneur]

I have an interesting data from my back yard to analyze.

I pay for renting an apartment 1000€ (landlord + sewer + water + maintenance + garbage collection) plus about 300€ for heating, electricity and the internet. Total 1300€ a month for having an apartment with everything we need to live.

There is a nice house for sale 50m away, same size like my apartment, with a tiny yard. An apartment with such a yard could be 200€ more expensive to rent than mine, there is also place to park a car in the yard (value 50€ a month if rented). The house is 550K€ plus probably 30K€ for a lawyer, taxes, etc. This is an OK price, it will be probably sold at this price. Obviously no electricity, no maintenance, no garbage, no water, etc. in the buying price.

I feel I'm better off renting. How exactly would I calculate how much better off I'm renting than buying a comparable house?

[smisk]

I've done some similar calculations recently - I think long term it's hard to beat owning a house with renting because you're constantly paying into the principal (I've seen it called "forced saving" here), but there are tradeoffs for sure. You're locking up a significant amount of money in the down payment, maintenance costs can be very uncertain.

Not sure what taxes etc are like in the UK, but I imagine your monthly payment would be at least 3x what you're paying on rent so unless you have a very high income or can buy with all or mostly cash, it's probably not worth devoting that much of your net worth to a home, especially if you expect to continue getting cheap rent.

In my area, my mortgage from 3 years ago is now significantly cheaper than renting a place of the same size, so it's a different story.

[YttriumNitrate]

So in this scenario, you can rent for 1,250€ a month, or buy for 580,000€? Unless you want to speculate on real estate appreciation, I would absolutely continue to rent.

[dreampreneur]

So in this scenario, you can rent for 1,250€ a month, or buy for 580,000€? Unless you want to speculate on real estate appreciation, I would absolutely continue to rent.

It's even more tilted towards renting. If I buy for 580,000€ I will still be paying at least 250€ or more a month for heating & electricity (which are included in the 1,250€ I'm paying now). And I can obviously relocate to a cheaper area when kids leave the "nest".

My question was rather: what is the break even price where buying or renting is economically equal? If I take 300,000€ and use the 4% rule, I'll end up with 12,000€ a year which endlessly cover my rent (without heating & electricity). So if I buy a house for 300,000€ that's more or less the same as renting a house / an apartment that costs me 1000€ a month. So in the real world scenario, where a house costs 580,000€, that's almost twice the renting price. Am I thinking correct?

[Morning Glory]

So in this scenario, you can rent for 1,250€ a month, or buy for 580,000€? Unless you want to speculate on real estate appreciation, I would absolutely continue to rent.

It's even more tilted towards renting. If I buy for 580,000€ I will still be paying at least 250€ or more a month for heating & electricity (which are included in the 1,250€ I'm paying now). And I can obviously relocate to a cheaper area when kids leave the "nest".

My question was rather: what is the break even price where buying or renting is economically equal? If I take 300,000€ and use the 4% rule, I'll end up with 12,000€ a year which endlessly cover my rent (without heating & electricity). So if I buy a house for 300,000€ that's more or less the same as renting a house / an apartment that costs me 1000€ a month. So in the real world scenario, where a house costs 580,000€, that's almost twice the renting price. Am I thinking correct?

Yes that is the same calculation i use. I take the annual price of renting and subtract anything that's included that I would have to pay myself if I owned, then multiply by 25. In my most recent case the rent was 1550 + utilities and I found a decent house for 259k with ~4200/yr for tax, insurance, and trash service so the math favored buying. [(1550x12)-4200]x25=360,000.

Instead of projecting the appreciation I use the heuristic that the house is likely going to appreciate enough to cover my transaction costs + major repairs/maintenance if I stay there for at least five years. In 2 cases I have had the house gain in value by more than that and in one case I had it decline in value.

[Freedomin5]

There are several rent vs buy calculators out there. Plug in your numbers and play around with them. It's much easier to use a calculator than to try to create your own equation because you are liable to forget something. Why reinvent the wheel?

Here’s an example of one: https://www.calculator.net/rent-vs-buy-calculator.html

[YttriumNitrate]

My question was rather: what is the break even price where buying or renting is economically equal? If I take 300,000€ and use the 4% rule, I'll end up with 12,000€ a year which endlessly cover my rent (without heating & electricity). So if I buy a house for 300,000€ that's more or less the same as renting a house / an apartment that costs me 1000€ a month. So in the real world scenario, where a house costs 580,000€, that's almost twice the renting price. Am I thinking correct?

You also need to consider property taxes, insurance, and capital maintenance in your calculations. Coming from a landlord's perspective, there's the 1% rule which states that when the monthly rent is 1% of the purchase price it will likely be profitable for the landlord. Your numbers are a third of that.

[Morning Glory]

My question was rather: what is the break even price where buying or renting is economically equal? If I take 300,000€ and use the 4% rule, I'll end up with 12,000€ a year which endlessly cover my rent (without heating & electricity). So if I buy a house for 300,000€ that's more or less the same as renting a house / an apartment that costs me 1000€ a month. So in the real world scenario, where a house costs 580,000€, that's almost twice the renting price. Am I thinking correct?

You also need to consider property taxes, insurance, and capital maintenance in your calculations. Coming from a landlord's perspective, there's the 1% rule which states that when the monthly rent is 1% of the purchase price it will likely be profitable for the landlord. Your numbers are a third of that.

That is a pretty good rule of thumb for landlords however it is a bit extreme for an owner-occupied house because it takes into account the fact that landlords pay higher mortgage rates than homeowners and also have to pay income tax on the rent income. A lot of times rhe property tax is higher on a rental vs owner occupied house as well. The rule also doesn't take into account the regional variations in ownership costs which are not a straight percentage of the house's market value. The case here does seem to be in favor of continuing to rent either way.

I know that some countries in Europe tax imputed rent for homeowners but I'm not sure which ones. Might be something to look into if you are considering buying later.

[dreampreneur]

There are several rent vs buy calculators out there. Plug in your numbers and play around with them. It's much easier to use a calculator than to try to create your own equation because you are liable to forget something. Why reinvent the wheel?

Here’s an example of one: https://www.calculator.net/rent-vs-buy-calculator.html

I just entered the numbers, being very generous towards buying and very conservative towards renting, playing devil's advocate. Dear Lord, the house is a Ferrari.

[dreampreneur]

My question was rather: what is the break even price where buying or renting is economically equal? If I take 300,000€ and use the 4% rule, I'll end up with 12,000€ a year which endlessly cover my rent (without heating & electricity). So if I buy a house for 300,000€ that's more or less the same as renting a house / an apartment that costs me 1000€ a month. So in the real world scenario, where a house costs 580,000€, that's almost twice the renting price. Am I thinking correct?

You also need to consider property taxes, insurance, and capital maintenance in your calculations. Coming from a landlord's perspective, there's the 1% rule which states that when the monthly rent is 1% of the purchase price it will likely be profitable for the landlord. Your numbers are a third of that.

I do taxes for a friend who is a landlord. I put literally everything I can into costs and it makes the whole project barely profitable. As a homeowner you can't deduct these costs if you live in the house, at least here in Europe.

[kite]

In addition to what the rent/buy calculators will tell you about the known expenses, it also depends upon:

1. How old you are.
2. How long you plan to stay there.
3. The time impact of the purchased home versus the rented home. ie... commuting, maintenance hours. 

[dreampreneur]

In addition to what the rent/buy calculators will tell you about the known expenses, it also depends upon:

1. How old you are.
2. How long you plan to stay there.
3. The time impact of the purchased home versus the rented home. ie... commuting, maintenance hours.

#3 is self explanatory, what do I do with #1 & #2?

[kite]

In addition to what the rent/buy calculators will tell you about the known expenses, it also depends upon:

1. How old you are.
2. How long you plan to stay there.
3. The time impact of the purchased home versus the rented home. ie... commuting, maintenance hours.

#3 is self explanatory, what do I do with #1 & #2?

I bought the house where I still live when I was in my early 20's. Paid it off in my early 40's. I'm now 56 (with over a decade of no mortgage) and expect to live here another 40 years. Renting would quadruple my monthly expenses for the rest of my life. It's a different calculus if I were buying today at 56 with a plan to retire somewhere else in around a decade. My expectation is that we'll leave this house feet first. The 'value' of the home in terms of it's sales price matters not at all. The value we extract from it is the reduction of housing expenses that began even before the mortgage was paid off. Comparable rent eclipsed the PITI payments around 5 years into my mortgage; after mortgage pay-off the gap grows at an even faster rate.

I thought this point was obvious, but there is no shortage of rent/buy calculators that come to the conclusion that renting is superior to owning. Mustachians grasp the difference when it comes to  automobiles, that purchasing is superior to leasing on a strict total cost perspective. But the lease comes with a sexy low monthly payment so many folks get seduced, effectively locking themselves into never ending car payments. Sure it's low. But zero is better than low.  And a reasonable used vehicle that will outlast similarly low monthly payments is the better deal. The fact is, it depends.  If you have a few years to live, rent a mansion & lease a hotrod. But if you're hanging around for decades in the same community, act with your eyes open.

The other thing that the "renting is superior" calculators ignore is the racial wealth disparity that happened when Black families were denied the same rights to purchase. If renting was better over a lifetime, the racial wealth disparity would go the other direction or it wouldn't have persisted for generations after redlining was outlawed.

[reeshau]

There are several rent vs buy calculators out there. Plug in your numbers and play around with them. It's much easier to use a calculator than to try to create your own equation because you are liable to forget something. Why reinvent the wheel?

Here’s an example of one: https://www.calculator.net/rent-vs-buy-calculator.html

I just entered the numbers, being very generous towards buying and very conservative towards renting, playing devil's advocate. Dear Lord, the house is a Ferrari.

Is your rent capped at all?   Certainly in many cities, real estate price is much more about the scarcity / difficulty in adding housing to the city, and not about rental economics.  Your rent sounds like a great bargain compared to my experience (in Dublin).  But if rents do increase, the thought is not simply what is my rent today vs. the house purchase, but what might it be in 10 or 20 years?  Taxes and utilities can change, but if there is likely to be further movement upward, buying is a way to lock in the costs, and take away the inflation of renting.

Also important for that thought is the duration; you mention the desire to relocate, but also only after kids leave the nest.  If you have young kids, that might be a reason to secure a location for your family.

[dreampreneur]

Yes, the rent is capped. It can be raised 15% every three years. What they forgot to do the first 7 years, which made my rent cheaper compared to the average.
If our kids move from home during their studies, we have 6.5-7 years left before we can relocate.