Author Topic: How to estimate Rent vs Own costs comparisons?  (Read 7596 times)

Doulos

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How to estimate Rent vs Own costs comparisons?
« on: March 24, 2015, 07:21:50 PM »
I have often wondered about how to properly gauge the value of renting an apartment vs buying a house<- edited for clarity.  Sorry for confusion.

We are very content renting an apartment for a few reasons.  (We, my wife and I).
#1 The biggest reason for me is that we do not tolerate extra work; Painting, fixing things, mowing lawns, maintaining hottubs, etc.

To be fair though in the comparison, I would really like to understand how the financials work out in both cases.

From my admittedly limited view;
We pay $781 per month for a luxury apartment.
- Includes small workout center, few computers to use with a printer, 2 pools, and a hot tub.
Utilities; $154
- Electric, gas, water, that is all.

$11220 a year.

In a straight payment vs payment comparison, I beat the crap out of mortgage+utilities+maintenance, but it seems like a paid off house is cheaper. 
A paid off home only has maintenance, utilities, and taxes, but then you have $200-400k capital stuck in a house.
$200k would be making me $8k at a conservative 4% after inflation.

There is also the tendency of people to buy much more house than they need.  We live in a 1 bed room apartment, we are content. 
If you buy a house you commonly end up with some land, a basement, garage, many rooms, etc.
Which that is all great, but then you have higher maintenance and utilities to pay for all that space.

So this really comes down to me seeking insight on how to itemize the comparison fairly to understand the differences.  I am looking for guidance.
« Last Edit: March 25, 2015, 03:04:06 PM by Doulos »

Roots&Wings

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #1 on: March 24, 2015, 07:24:01 PM »

Doulos

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #2 on: March 24, 2015, 08:13:44 PM »
That calculator assumes the same value house is rented or bought.
I am talking about renting apartments vs buying houses.

Is there somewhere in there I can disassociate that?

I did notice that the 1 year lease drives prices through the roof for owning a house, not sure why; closing costs?
Is there a 'fair' number of years to assume to make a reasonable comparison?

waltworks

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #3 on: March 24, 2015, 09:15:49 PM »
Figure out what buying a condo like your apartment would cost, and use that as your basis.

1 year is a horrible amount of time to own a house/condo/etc because the fees to buy (closing costs) often run to 3-4%, and then the costs to sell are ~6-10%, plus you'll pay capital gains on any profits (there probably won't be any, unless you get some crazy appreciation).

So it's a combo of costs to buy/sell, and tax law. The longer you plan to stay somewhere, all things being equal, the better you will do financially buying. That's not to say it's always better to buy even if you plan to stay somewhere for 50 years, but shorter lengths of time will always compare less favorably.

-W

That calculator assumes the same value house is rented or bought.
I am talking about renting apartments vs buying houses.

Is there somewhere in there I can disassociate that?

I did notice that the 1 year lease drives prices through the roof for owning a house, not sure why; closing costs?
Is there a 'fair' number of years to assume to make a reasonable comparison?

ShoulderThingThatGoesUp

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #4 on: March 25, 2015, 05:15:44 AM »
Apartments and houses aren't really perfect substitutes, as Walt alludes to.

Doulos

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #5 on: March 25, 2015, 02:59:46 PM »
Apartments and houses aren't really perfect substitutes, as Walt alludes to.

That is exactly what I am saying!

I need a way to compare non-perfect substitutes.

The real question there is "How to compare housing options."  They are not all equal.  You cannot just assume house. 
That would be similar to assuming all investments are always bonds.

This is the very heart of my question.  How do you reasonably compare the 'true' housing costs of various options?
  • Owning a house.
  • Bank owning your house with you paying a mortgage.
  • Renting a house.
  • Owning an apartment.
  • Bank owning your apartment with you paying a mortgage.
  • Renting an apartment.
  • Hotel rooms.  (we can generally assume this is super expensive, but I figured I should list it.)
I am sure there are more I cannot think of right now.

waltworks

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #6 on: March 25, 2015, 04:52:33 PM »
Unfortunately for you, IRL often apples cannot be compared to oranges quantitatively.

-W

arebelspy

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #7 on: March 26, 2015, 09:47:07 AM »
Unfortunately for you, IRL often apples cannot be compared to oranges quantitatively.

Right.  There's substantial differences, so comparing the numbers doesn't necessarily make sense.

If it's only about the numbers (i.e. if it's cheaper to live in an apartment, and you don't need the benefits of a house...), run the NYT Calculator and compare the buying a house to renting the apartment.  Likely renting will come out better, but you are giving up things (size/space, for example) -- if you don't care about those things, just the cheapest option, then the calculator will tell you that.

If you do care about those things, then you'll need to rent a house or buy a house, in which case the calculator can compare apples to apples.

Either way, I don't see why the calculator is insufficient - either you care about the amenities, so you can compare apples to apples, or you don't care about the amenities, just the numbers, so you can still compare it for just the numbers.
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Doulos

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #8 on: March 26, 2015, 02:03:57 PM »
...If it's only about the numbers (i.e. if it's cheaper to live in an apartment, and you don't need the benefits of a house...), run the NYT Calculator and compare the buying a house to renting the apartment.  Likely renting will come out better, but you are giving up things (size/space, for example) -- if you don't care about those things, just the cheapest option, then the calculator will tell you that...

This calculator does not allow for 2 base numbers.  The cost of the house cannot be dissociated from the cost of the apartment?

Maybe I am just missing your point.

But as you commonly talk about emotional choices, I would figure this kind of comparison would be important to you in particular.

We all need to be able to evaluate the full cost of a each option.  Apartment, trailer, condo, house, whatever.
Then after the costs are analysed, you can make a decision.

You talk is if the decision comes first without the cost analysis.

You dont need a hot tub, lawn, extra bathrooms, basement, garage, etc.  Those are things you want that you pay for.

I am seeking a way to quantitatively find an expense number for each option that hopefully can then be combined into one nice calculation to figure out expenses for 'shelter'.
That calculator wants to specifically compare renting a house to buying a house on mortgage.
- it does not really give you a way to say "this apartment's year cost is x"  And "this house's yearly cost is x"  And it seems to ignore the option of buying the house outright.

Edit:
Even these individual decisions that seem all emotional can come down to analysis of Time vs Money.
We are all here with the idea that our time is worth money or we would not looking to FIRE at all.  You would just keep working your 40 hours for the money.
- Thus you must assume your time is worth more than the hourly rate of whatever job you are quitting.

$50k a year is reasonable, but it would change from person to person.  That is $25 per hour.
- Thus you have to look at things like owning a house vs renting an apartment in a light in which your time to maintain, paint, mow the lawn, etc your house has a price.

I am not trying to compare apples to oranges; I am trying to covert all these options to just apples by figuring out a way to fully compare all the costs.
« Last Edit: March 26, 2015, 02:16:03 PM by Doulos »

arebelspy

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #9 on: March 26, 2015, 02:15:42 PM »
Yes, you are missing my point.

Evaluate the options you want.

Then decide the best way to get those - renting or buying the choice that gives you those amenities.

The calculator is perfect for that.

If you:
1) Don't want/need the amenities of a house, but just an apartment, then compare renting an apartment to buying a house on the calculator.  You may not need the amenities, but if it's financially smarter (according to the NYT Calc) to buy the house, then you may get it anyways.  And if it's financially smarter to rent the apartment, great, do that, cause you decided you didn't need the amenities.

2) Do want/need the amenities of a house, then you rule out the apartment to begin with, and compare buying a house to renting an equivalent one, using the calculator.

But that's where the emotional decision comes in -- at the beginning.  If you want the amenities, even if it's not financially the best move, then you choose the amenities (the emotion over math), and compare those options that have those amenities.  If you don't value the emotion, just math, then you compare the options (as in #1, above), and go with the smarter one, regardless of if it has amenities or not.
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waltworks

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #10 on: March 26, 2015, 02:35:32 PM »
Let's try one more time.

You need housing. Well, ok, you don't. But let's assume you want a roof over your head. That can mean a room in the cheapest 12-person boarding house you can find, or it can mean a palatial estate on your own island, and everything in between. You can rent OR buy all of those options if you want to (ie, buy the boarding house and live in one room, rent the private island).

Costs for every option will vary based on location and specific amenities, so you can't generically compare them easily.

Financially, obviously the cheapest option will be best but most people don't want a tent at the KOA to be their housing solution. Figuring out what costs what and what you are willing to pay is going to depend on you, and where you live. It's not really something you need anything more than a piece of paper or a spreadsheet for, and there's no point in making it more complex than it needs to be - get the cheapest place that will make you happy.

The reason the rent vs buy calcuator exists is that the more interesting question, once you've decided what sort of dwelling you want, is whether or not you should buy or rent said dwelling. Thanks to Byzantine tax laws and variable mortgage rates/investment returns/etc, it's a complex and difficult question to answer that can be tackled quantitatively.

So to answer your question again: the cheapest housing is the cheapest housing.

-W

Doulos

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #11 on: March 26, 2015, 03:51:28 PM »
Then why do people keep trying to tell me that buying a house with a mortgage is always a better financial decision than renting an apartment?
How do they measure all these costs that show that "owning a house" = "investing in yourself" is far superior?
- Am I the only person who hears these kinds of statements?

Both of you seem to agree that renting a small apartment will be cheaper than house ownership without any analysis or math, etc. 
- Are all these people saying owning a house is better financially just plain wrong?

If renting small apartments is cheaper than owning houses in just about all cases, Why are people looking to FIRE not selling their houses and retiring early? 
Or at least handing that advice out routinely? 

This entire site is about making choices based on analyzing the costs first then deciding if the choice is worth the cost. 
You are both suggesting making emotional decisions 1st, then not even bothering with reviewing how much that is costing you.

Your answers are like saying "Everyone should just buy whatever car makes them happy, and just try to get the best deal."  But people here do not say that. 
- They advice against "Keeping up with the Jones". 
- They advice towards used cars with gas efficiency for specific economic reasons.  There is still some room for personal preference, emotion and choice in there.

I am looking for this same kind of analysis for the many different options for shelter; RV, Trailer, Apartment, Condo, House, Hotel, etc.
I was expecting answers more like in general "apartments cost x% less" and you can make "x% off that capital", but you can "hedge inflation by 3.22% with your total house price", etc, etc.

Tent, probably does win in the want to retire early for cost, if you really like the outdoors.  But there are other costs associated with even that.
But maybe because of all the 3-4% mortgage stuff, owning the biggest house you can convince a bank to finance for you is suddenly the best decision financially.

Edit: on final note.  That calculator assumes you have already decided on a house and how much it costs as opposed to should chose to buy this house at all.  It is based on the question I want answered being answered already.
« Last Edit: March 26, 2015, 03:54:32 PM by Doulos »

arebelspy

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #12 on: March 26, 2015, 04:31:34 PM »
Then why do people keep trying to tell me that buying a house with a mortgage is always a better financial decision than renting an apartment?
How do they measure all these costs that show that "owning a house" = "investing in yourself" is far superior?
- Am I the only person who hears these kinds of statements?

There are a lot of people out there bad at finances.  Don't listen to them.

Do the math yourself.

Both of you seem to agree that renting a small apartment will be cheaper than house ownership without any analysis or math, etc. 

No, we are saying that you should run the numbers.  I specifically said if the house comes out financially better, you could choose to buy it even if you don't need the amenities.

If renting small apartments is cheaper than owning houses in just about all cases, Why are people looking to FIRE not selling their houses and retiring early? 

Because they want the lifestyle and comforts the house provides, and it's worth working the extra years to them to have that.


This entire site is about making choices based on analyzing the costs first then deciding if the choice is worth the cost. 
You are both suggesting making emotional decisions 1st, then not even bothering with reviewing how much that is costing you.

We are suggesting you first need to figure out what you need, then compare the options that give you that.  If you have a family of 10, you might rule out the 1 bedroom apartment, for example.  If you are single, you might rule out the 10-bedroom house.

Minimize your cost, absolutely, but within the parameters of what you define you want and need.

]I was expecting answers more like in general "apartments cost x% less" and you can make "x% off that capital", but you can "hedge inflation by 3.22% with your total house price", etc, etc.

That's what the calculator is for.  We already linked to it, and mentioned it, several times, but you seem unwilling to run the numbers. 

Tent, probably does win in the want to retire early for cost, if you really like the outdoors.  But there are other costs associated with even that.

Exactly.  That's why you need to define your needs/wants first.

But maybe because of all the 3-4% mortgage stuff, owning the biggest house you can convince a bank to finance for you is suddenly the best decision financially.

It is not.

Edit: on final note.  That calculator assumes you have already decided on a house and how much it costs as opposed to should chose to buy this house at all.  It is based on the question I want answered being answered already.

No, it's not.  Because it lets you put in multiple numbers (it's not a one time use), so you can compare options.  And then it tells you if you should buy it or rent.  The analysis it gives you answers exactly what you want (which I bolded).
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waltworks

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #13 on: March 26, 2015, 05:37:08 PM »
You should absolutely use your money in the way that will make you the most happy (for the long term), including when making decisions about housing. That could mean a mansion, and that's ok, as long as you're making a conscious decision to spend more money for it.

Minimizing costs in every possible way to meet basic needs is not the goal for most people here - after all, one can eat at soup kitchens and sleep under bridges for free in most of the US, so if absolute fastest FI is your goal, there you go. Expenses of zero = zero years needed to reach retirement.

I'd go on, but Arebelspy covered most of my points. You are just beating your head against a brick wall of your own construction here.

-W

accolay

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #14 on: March 28, 2015, 09:59:49 PM »
Wondering if this calculator might be what you're looking for? I like using it in the Deluxe Mode. http://michaelbluejay.com/house/rentvsbuy.html

sdp

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #15 on: March 29, 2015, 07:56:28 AM »
Multiply your rent by 240.  that's the break-even point for owning the home for five years, with a 20% down payment and mortgage around 4% in a part of the country with average taxes and insurance.  If you can buy a house for less than that and expect to stay in the house for 5 or more years, then it is usually financially better to buy the house.....

take your rent... 781 X 240= 187,440.  Look on the MLS for homes that cost 195,000 or less and see if there is something that is more appealing to you than your apartment.

If your goal is to value your time at 25 bucks an hour, how much has this exercise cost you?

arebelspy

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #16 on: March 29, 2015, 09:08:02 AM »
Multiply your rent by 240.  that's the break-even point for owning the home for five years, with a 20% down payment and mortgage around 4% in a part of the country with average taxes and insurance.  If you can buy a house for less than that and expect to stay in the house for 5 or more years, then it is usually financially better to buy the house.....

take your rent... 781 X 240= 187,440.  Look on the MLS for homes that cost 195,000 or less and see if there is something that is more appealing to you than your apartment.

If your goal is to value your time at 25 bucks an hour, how much has this exercise cost you?

That's definitely homeowner math rather than landlord math.  No way I'd buy something renting for 781 for 195k.  I wouldn't buy it if it cost half that.

So different calculations come into play for buying something that makes financial sense versus buying a "home" that makes sense for other reasons.
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Doulos

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #17 on: March 30, 2015, 04:51:06 PM »
...If your goal is to value your time at 25 bucks an hour, how much has this exercise cost you?

I value my time higher than that $25 example.  And I consider the time spent on these forums to be profitable.
The value of advice I am getting here is looking to literally cut years off my FIRE.

...That's definitely homeowner math rather than landlord math.  No way I'd buy something renting for 781 for 195k.  I wouldn't buy it if it cost half that.

So different calculations come into play for buying something that makes financial sense versus buying a "home" that makes sense for other reasons.
Now this in interesting.  I would really like to hear how the financials look from that perspective.  Please elaborate at least a little? 
For example if you were to get $781 per month in rent, what would you reasonably pay for that unit?  What time scales do you think in?

waltworks

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #18 on: March 30, 2015, 05:00:44 PM »
You need to go read, like, 50 random buy/sell/rent threads here. Then come back, because the information you want is already out there many, many times. Or google "1% rule" and read what you find.

-W

arebelspy

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #19 on: March 30, 2015, 05:34:15 PM »
Now this in interesting.  I would really like to hear how the financials look from that perspective.  Please elaborate at least a little? 
For example if you were to get $781 per month in rent, what would you reasonably pay for that unit?  What time scales do you think in?

Maybe 30-35k?  Decades.

I'm willing to lower my rent/price ratio for nicer properties (where rents would be well above $1000), but anything renting for only $800 better be a lot closer to the 2% rule. 

0.04% rule is ruin (cash flow negative).  But again, that's different than what you should be comparing for rent vs. own. They're completely different metrics, for good reason.  Though if they're way far off, like in this scenario, it's a good indication that you should rent, and just let your landlord subsidize you with cheap housing he's getting a crap return on, so you can get a good return on your money elsewhere.
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Kriegsspiel

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #20 on: March 30, 2015, 05:57:50 PM »
I kinda think like this for comparing buying/renting.

IF
(rent + renters insurance) x 300 < (cost of a house1) + (home insurance + property taxes + upkeep costs2) x 300

THEN
Renting is better.

EXAMPLE
Rent for 3 bedroom house is $1,000/month, renters insurance is $20 a month
(1,000 + 20) x 300 = 306,000

Equivalent house costs $60,000, insurance is $50, taxes are $50, upkeep is $100 (2% of $60,000)
60,000 + (50 + 50 + 100) x 300 = 60,000 + 60,000 = 120,000



1. House price plus any rehab and purchasing costs like inspections.
2. Maybe 2% of the house cost per year?

sdp

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #21 on: March 30, 2015, 10:58:55 PM »
"That's definitely homeowner math rather than landlord math.  No way I'd buy something renting for 781 for 195k.  I wouldn't buy it if it cost half that..........."

Oooops, you totally missed the point of the comparison.  he is not buying a rental...... it  is a comparison of his cashflow and asset appreciation to renting at 781 vs buying something at or below 195K.  for all we know what he can buy for 195K might rent in his local market for 9500 bucks a month.  but he is not going to rent it, it is his home......

 that apartment he rents for 781, if the complex were to be converted to condos, could probably sell for 15K-60K per unit.....  but then we don't even know where this guy lives, so who knows- but that is not the issue at hand anyway...

If he finds a house that he likes much better than the apartment and it is less than 195K, and he expects to live in it for atleast 5 years, and can get a loan for at or below 4% then it usually makes financial sense to move-no landlord math involved... 

arebelspy

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #22 on: March 30, 2015, 11:57:01 PM »
"That's definitely homeowner math rather than landlord math.  No way I'd buy something renting for 781 for 195k.  I wouldn't buy it if it cost half that..........."

Oooops, you totally missed the point of the comparison. 

I think the first sentence you quoted of mine shows I didn't miss it. I was providing an alternate point of view to consider. :)
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money_bunny

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #23 on: March 31, 2015, 06:19:27 AM »
I think Arebelspy is on point with "Thinking like a landlord" when it comes to looking at personal property ownership as well. Do the numbers like a landlord and then add in the emotions and the other variables that are important to you as homeowners. The other thing to look at is the "Exit strategy" or "So who am I going to be able to sell this to? The Landlord perspective as a business is much less aimed at triggering deep implanted triggers for security, success, class, and family than most of the homeowner targeted sales techniques use.

I thought I knew a decent amount about the business and then I started out as a tiny landlord (one unit). It completely changed my perspective. I need to do a sell/or keep renting post in the near future to see what some of the people here think of my numbers.

I as a single guy do not need a whole house. Probably due to living in a very high cost of living area for two of us, still don't need a house. If I had children, suddenly locking in a good school district for 12-14 years makes a lot of sense. The rental 1-2% rule type places are in the areas with the problematic schools. The properties that are in the better districts are not. I would pay a serious bonus to have my children in better schools.

I eventually will buy property. There are projects that I want to do mostly with solar that I need a place. It won't be in NJ though.


clarkfan1979

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #24 on: March 31, 2015, 06:28:14 AM »
Do rent vs. buy calculators factor in if you fix things yourself?

ender

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #25 on: March 31, 2015, 06:35:34 AM »
Then why do people keep trying to tell me that buying a house with a mortgage is always a better financial decision than renting an apartment?
How do they measure all these costs that show that "owning a house" = "investing in yourself" is far superior?
- Am I the only person who hears these kinds of statements?

Our culture is conditioned to think that renting is throwing away money.

NumberCruncher

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #26 on: March 31, 2015, 07:34:56 AM »
Do rent vs. buy calculators factor in if you fix things yourself?

Every rent vs. calculator I've seen has an input for yearly maintenance costs. The default is about the average a homeowner spends, including all the big ticket items that come by every 10-15 years. You can change just about any assumption, though.

JLR

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Re: How to estimate Rent vs Own costs comparisons?
« Reply #27 on: April 04, 2015, 12:22:28 AM »
For our numbers and situation renting is better. We would only buy to enjoy the benefits of ownership (no periodic inspections by the property manager every 3 months. Security that the landlord won't suddenly decide to sell. Etc.)

I believe that owning a home is good for most people (non-mustachians who aren't in control of their money) for two reasons:

1. Houses tend to appreciate over time
2. Forced payments (that a non-mustachian wouldn't be able to simply save and not spend over time).

On point #1, I don't believe that our housing market isn't going to have much growth in the next 10-15 years or more. Your market may be different.

On point #2, our rent is less than a mortgage would be. But, I make sure that we save the difference between rent and what our mortgage plus maintenance would be. This money is ear marked to one day be used to go towards a PPOR if circumstances change and it is the right choice. In the mean time, we are strong enough to enforce these payments on ourselves and not touch them. We are then able to invest that money as we see fit. Maybe this would work for you.

It sounds like an apartment is right for your circumstances, unless you were interested in going down the route of buying a house and renting out rooms. Maybe one of your tenants would mow the lawns for a break in the rent! :)