Author Topic: Convince me not to buy a house - spreadsheet wizards wanted!  (Read 5284 times)

Manguy888

  • Bristles
  • ***
  • Posts: 252
  • Location: Rhode Island
    • EA Mann, Writer
Convince me not to buy a house - spreadsheet wizards wanted!
« on: April 20, 2015, 12:04:24 PM »
Hey All,

My wife and I are selling our house and trying to decide whether to buy again next spring or rent. We are pretty much neutral on home ownership - we don't particularly love it or hate it - and we'll basically follow the numbers.

I made a model to compare rent vs. own in my area - the spreadsheet is attached. I think that I considered everything and that my numbers are correct. It includes opportunity cost of a down payment, home repair, taxes, insurance. No matter which variables I tweak, I cannot make 'renting' win out over owning.

Calling on people smarter than myself to take a look at my spreadsheet and tell me if a) I missed something or b) some of my math/assumptions are wrong.

Some facts about the sheet:
 - anything in yellow is a variable, you can change it and it'll affect the whole sheet
 - targeting homes between 225k-275k in my area, we've seen plenty we'd be happy with
 - renting a house in a decent school district for my family of 4 appears to run about 1600-2000 per month. Anything less doesn't seem suitable in our area
 - using the 15-year mortgage tab only. 30 year mortgage tab isn't done.


I appreciate any help. I realize there are websites that do what my spreadsheet does (and better), but I'm stubborn and need to do this stuff myself to understand the methodology.

britton

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #1 on: April 20, 2015, 01:14:10 PM »
Manguy888,
I looked through your spreadsheet and the math all seems good. You are a manguy after my own heart in that I always need to do it myself as well.

What I would attack is your main assumption that all valuations (home and stock market are going up). Your model only works in the most positive and bullish of cases. To truly model which choice is best you need to consider the expected value in all cases good and bad, which I think is hard to do.

You already know that the stock market can fluctuate wildly. Have you seen this graph (new to me until a couple of months ago) about inflation adjusted US home prices?
http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/
Current home prices are only slightly above where they were a century ago. And given the Fed's current low interest rates, I suspect when they increase them housing prices will start to go down again as buyers will have less money to spend.

The other big problem is that buying a house leaves you exposed to greater risk than other diversified investments. What if there is a toxic spill in your neighborhood? Or there is a crime wave? Or what if...? Whatever the negative downside as a renter you can always leave (at the end of the lease or even in the middle if you are willing to break it). There is positive value to this flexibility that renting offers that is not built into your calculation.

I don't know if I have seen any online calculation (please share if you have one) that can figure out these sorts of risks, but they should be a consideration when choosing renting over owning.

Personally, I do own, but if i ever sell this place I wouldn't again. I used to sleep a lot easier when I was renting since I knew that someone else always bore the risk (and admittedly the potential upside).

Good luck with whatever you decide.


dktoller

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #2 on: April 20, 2015, 01:27:14 PM »
Looks like your "Total Buying" cell (E26) omits all your monthly payments!  The cell formula includes Taxes and Insurance (Columns I and J), but not Mortgage payments (Column K). Also, be sure not to double-count Taxes and Insurance when you amend this since they are already reflected in the monthly payment.

Other thoughts: realtor's fee upon purchase, renters insurance, and include the 50k down payment on the Buying side.

Manguy888

  • Bristles
  • ***
  • Posts: 252
  • Location: Rhode Island
    • EA Mann, Writer
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #3 on: April 20, 2015, 01:37:22 PM »
dktoller - the mortgage payments are in that spot just for reference. The total interest I'm paying it in the next column over, and I'm assuming that the other part of the payment, the principal, is being paid to myself.

Realtor's fee's is a great add, basically takes 6% off of your house value.

Thanks so much for taking the time to look over this!

dktoller

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #4 on: April 20, 2015, 01:49:33 PM »
I agree the mortgage principle payment is a form of savings.  But if your "Buying" scenario number includes the asset value (house) you need to include the total of the payments you have made against the house.

math-ya

  • Stubble
  • **
  • Posts: 106
  • Location: USA
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #5 on: April 20, 2015, 01:51:43 PM »

Current home prices are only slightly above where they were a century ago. And given the Fed's current low interest rates, I suspect when they increase them housing prices will start to go down again as buyers will have less money to spend.

This is totally wrong.
the reason why owning looks better is simply risk vs reward. Home owners generally pay less than renters because of the associated risks they have to bear.  Are you considering the equity and appreciation you are gaining?

Manguy888

  • Bristles
  • ***
  • Posts: 252
  • Location: Rhode Island
    • EA Mann, Writer
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #6 on: April 20, 2015, 02:00:34 PM »
The equity is built into the spreadsheet, and I tried to have the house prices increase only by inflation so that it would be conservative.

As for the risk, I think we're doing our best to mitigate that by a) buying in the town with the best schools in the state where houses have appreciated greater than the average (reflected in the high-ish taxes), looking for a property at high elevation (our last place had flood insurance - never again)

I think I heard that rents are high in towns with good schools compared to the average, and that might be playing out here. I wouldn't say owning is always a better deal than renting, but I think this spreadsheet shows that it definitely is in my location (based on numbers only)

Agree with anyone who said risk is tough to calculate in a simplistic model like this. You could multiple the odds of it happening by the total loss (a simple but often used risk metric) but I wouldn't know what the numbers were or how many risks to consider.

I really appreciate everyone's comments, you've got the brain juices flowing.

Manguy888

  • Bristles
  • ***
  • Posts: 252
  • Location: Rhode Island
    • EA Mann, Writer
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #7 on: April 21, 2015, 09:42:45 AM »
I made some updates to this spreadsheet based on feedback. I'm re-attaching it here, maybe it will be helpful to someone

changes
 - Added a 'realtor fee' variable which gets taken out of the final home price
 - Added a 'home appreciation' variable so that you can separate between general inflation and the increase in your home price for modeling purposes

Drifterrider

  • Handlebar Stache
  • *****
  • Posts: 1119
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #8 on: April 21, 2015, 10:16:23 AM »
I have not reviewed your spreadsheet.  Let's assume the buy/rent numbers actually equal.

What would make you feel more secure/comfortable/happy?  How long do you think you will remain in that area?  If you have to move, can you rent your house for at least break even?

What is your goal in life?

Manguy888

  • Bristles
  • ***
  • Posts: 252
  • Location: Rhode Island
    • EA Mann, Writer
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #9 on: April 21, 2015, 10:27:05 AM »
Drifterrider - I think that if two houses were side by side, same type of house, and we could rent one or own the other, and the math was even in the long term, we would probably rent. the lack of risk would make that decision easy I think.

But my spreadsheet makes it clear that not only is owning a better choice financially, it's a MUCH better choice, in our area at least.

If we buy, our goal is to pay off the house with a 15 year mortgage. By the time the house is paid off, our girls will be leaving the house and we should be FI (this is all best case scenario, mind you). At this point we decide whether to keep the house, downgrade to a smaller house, or rent. But even over this 15 year term, which isn't that long, it seems like owning is the answer where I live.

I'd encourage you to take a look at the spreadsheet if you have time. Thanks!

Drifterrider

  • Handlebar Stache
  • *****
  • Posts: 1119
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #10 on: April 21, 2015, 01:21:45 PM »
Drifterrider - I think that if two houses were side by side, same type of house, and we could rent one or own the other, and the math was even in the long term, we would probably rent. the lack of risk would make that decision easy I think.

But my spreadsheet makes it clear that not only is owning a better choice financially, it's a MUCH better choice, in our area at least.

If we buy, our goal is to pay off the house with a 15 year mortgage. By the time the house is paid off, our girls will be leaving the house and we should be FI (this is all best case scenario, mind you). At this point we decide whether to keep the house, downgrade to a smaller house, or rent. But even over this 15 year term, which isn't that long, it seems like owning is the answer where I live.
I'd encourage you to take a look at the spreadsheet if you have time. Thanks!

You already knew the answer (for you in your situation), you just needed/wanted a sanity check :)_

BigRed

  • Stubble
  • **
  • Posts: 200
  • Age: 43
  • Location: NJ
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #11 on: April 22, 2015, 07:03:37 PM »
I agree the mortgage principle payment is a form of savings.  But if your "Buying" scenario number includes the asset value (house) you need to include the total of the payments you have made against the house.

This is important, and you have not modeled it correctly.  You cannot count the entire equity of the house as yours at the end (G22) without accounting for the fact that you paid the full $250k over the 15 year mortgage (you have to pay for the house, you don't just get to keep the whole value at the end).  The idea that the house is a net gain of $79k can't possibly be right, since you only net $22k from the sale at the end ($272k final value - $250k cost of the house) plus there are the various costs of interest, repairs and taxes over the years.  There's no way your calculation is correct.

I put your model into the New York Times calculator and the rent number that breaks even for a $250k house with your modeling assumptions is $1789/month, which means your scenario is a wash, not a huge win for buying. 

Manguy888

  • Bristles
  • ***
  • Posts: 252
  • Location: Rhode Island
    • EA Mann, Writer
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #12 on: April 23, 2015, 05:28:25 AM »
BigRed - I appreciate your detailed look into the spreadsheet. I'm not sure I understand what you're saying though. The cost of repairs, taxes and insurance are right on the sheet and are subtracted from the total gain.

As far as the house value at the end, since I have a paid off house at the end of the mortgage, I have an asset worth 272k after realtor's fees. True, this was mostly my own money as I paid off my mortgage. But I still retain this money in the value of the house, where in the rental scenario none of my monthly payments are retained.

There are opportunity costs to putting money into a mortgage, but they're predicated on a low enough rent payment, compared to a mortgage, that there is extra money to invest. You have to live somewhere, and rents in my area are fairly high, which makes the opoortunity cost of paying a mortgage fairly low.

I'm far from an expert here, so if I'm wrong please point it out.

BigRed

  • Stubble
  • **
  • Posts: 200
  • Age: 43
  • Location: NJ
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #13 on: April 23, 2015, 10:53:26 AM »
The point is you have to pay for the house.  You can't leave out the principle payments on the mortgage AND count the full sale price of the house.  That's double counting.  That's why in your spreadsheet buying looks so much better than renting.  You've left off over $200,000 in costs on the buy side.  You can claim that you're paying that money to yourself, but you are not.  That money goes to the bank.  Then, you get it back when you sell the house, plus any appreciation or depreciation.  But, you've only counted the sale proceeds, not the money that went out to the bank.

Manguy888

  • Bristles
  • ***
  • Posts: 252
  • Location: Rhode Island
    • EA Mann, Writer
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #14 on: April 24, 2015, 08:15:56 AM »
I found one error in my spreadsheet that I've fixed. I was not accounting for the opportunity cost of the money spent on home maintenance. That is money that could be invested, provided the total of mortgage+tax+insurance+maintenance is more than the cost of renting.

With this new spreadsheet, the numbers look fairly close to the NYT buy/rent calculator. I'm not accounting for the tax-deductibility of interest and taxes, which would give a little boost to buying. But other than that it's pretty close.

The new breakeven point in my model is 1550 per month to rent. This would make home ownership a wash. I don't think we can get a decent place for that near me, so home ownership is probably the winner here, just not by as much as I thought. The real question is whether that (now smaller) benefit is worth some of the risks of home ownership. Risks that are hard to quantify and not included on this sheet.

At the very least I feel much more empowered about the decision. I'm attaching a new spreadsheet - thanks for all the great inputs.

Bicycle_B

  • Handlebar Stache
  • *****
  • Posts: 1821
  • Mustachian-ish in Live Music Capital of the World
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #15 on: May 03, 2015, 07:50:00 PM »
The point is you have to pay for the house.  You can't leave out the principle payments on the mortgage AND count the full sale price of the house.  That's double counting.  That's why in your spreadsheet buying looks so much better than renting.  You've left off over $200,000 in costs on the buy side.  You can claim that you're paying that money to yourself, but you are not.  That money goes to the bank.  Then, you get it back when you sell the house, plus any appreciation or depreciation.  But, you've only counted the sale proceeds, not the money that went out to the bank.

I agree with BigRed.  You have to pay for the house, and your spreadsheet excludes the principal payments from your cost of purchase.  They're on the spreadsheet in a formula, but at the bottom of the column, the spreadsheet has a comment instead of adding up the amounts. 

To me it also appears that it is about a wash, based on the cost figures you give.  Your combination of repair costs, tax and so on also seem reasonable.  So I do think it's a wash, roughly.

Considering you state a personal preference for renting in the event of a financial wash, please reconsider BigRed's comments carefully.  I think they would lead you to a different conclusion from the one you are currently leaning towards. 

That said, you make your own decisions, of course.

NoNonsenseLandlord

  • Bristles
  • ***
  • Posts: 396
  • Age: 60
  • Location: Eagan, MN
    • No Nonsense Landlord
Re: Convince me not to buy a house - spreadsheet wizards wanted!
« Reply #16 on: May 05, 2015, 07:03:18 AM »
If you rent, maximize the rental situation.

Rent only the square footage you need.
Move close to your job, minimize commute costs.
If you change jobs, move.
Buy less 'stuff', you need to be able to move easily.  (no lawn mowers, etc.)
Invest your savings.

If you do that, renting is WAY cheaper than buying.  If you just rent a house and stay put, you might as well buy.