Use this rent vs. buy calculator to decide whether to buy or rent that place you call home.
I have researched the web to find the perfect rent vs. buy calculator and found the most accurate one on Reddit. Of course!
So I built this calculator to be interactive to decide when to rent and when to buy a house for your family.
The Rent vs. Buy Calculator
Steps to Figure out Rent or Buy
Follow the following steps to use the Rent vs Buy Calculator:
Total Time: 2 minutes
Enter your Basic Buy Information
* The price of your home
* Your pre-qualified Mortgage rate APR
* The length, in years, of mortgage
Edit Economic Assumptions
* House appreciation
* Rental appreciation
* Investment returns, post tax
* Inflation rate
Tweak Optional Information to Fine Tune Results
We have a bunch of additional information you can enter to fine tune your results.
But you can skip these and use the default numbers I’ve added in already.
View Results
Once you’ve completed steps 1 to 3, you should be able to view results
What’s your results? And are you following he calculator’s advice? Comment below and let me know!
What Drives the Rent vs Buy Results?
Most people think the drivers of whether to buy a house are those “basic buy information” factors I’ve listed above:
- The price of the house
- Your mortgage rate
- Whether to get a 30-year or 15-year mortgage.
But that’s actually not true.
The price of your house has a smaller effect on your rent or buy decision.
And mortgage rates almost always move opposite of housing prices. We have record-low mortgage rates right now, which is why we have record-high housing prices.
Think about buying a house this way:
You have a bunch of money. You can buy stocks with this money. Or, you can use it to pay down your house.
You do that for 30 years and in the end you either own a house or own stocks.
If the value of the house and the stocks stay constant, then it doesn’t really matter where you put your money.
It’s like saying if you want to put your money in the red box or the blue box. At the end of the day, it’s just a box that holds money.
But in reality, stocks and houses change in value.
How much stocks and houses change in value is the MOST IMPORTANT thing that impacts your rent vs. buy decision.
The economic assumptions section in the rent vs. buy calculator above plays the most critical role.
Growth is Everything
The rate of appreciation for your house, investment, and rental matters A LOT in your rent vs buy calculation.
You can test this yourself – update the house appreciation (%) or the investment returns (%) and see your results update.
The problem is these economic assumptions are also the hardest variables to forecast.
If you invest in index funds, you can argue that you may be able to forecast your investment returns with more confidence based on historical performance.
But it is near-impossible to estimate how much your house will appreciate in value.
We can’t predict if you’re living in the next San Francisco, where housing boomed for the past decade. Or whether NYC’s housing market has reached its peak.
And we don’t know if, for the next 30 years, the migration will move toward suburban or urban, East Coast or West Coast, or just as likely, neither of these places.
If you live in New York or New Delhi, Chicago or Sydney, or the suburbs of major cities worldwide, it’s tough to predict whether your hood will be the next “it” hood.
Rent vs Buy Calculator: Summary
I hope you enjoyed using this rent vs buy calculator!
And I’d love to hear your results! Please share your results below, and let me know if you are renting or buying and why.
Lastly, I want to share that I built this model by leveraging an existing model built by a fellow Redditor.
However, since I only have access to the model, I no longer remember which Redditor had created it.
So if you are the original creator of this fabulous Rent vs. Buy calculator, reach out to me, and I’ll be sure to credit you.
What’s Next?
After the rent vs. buy decision, now find out how much of a house you should buy: How Much House Can I Afford for FI/RE?
In this post, I argue that buying a house is not an investment: Stocks vs. Real Estate: Never Buy a House as Investment.
What is wrong with America? Two words: Wealth Inequality: How to Make Money Despite Wealth Inequality
Geoff says
I’m not seeing a down payment % amount or Financial Leverage component to your model.
Financial Leverage should be and is a huge consideration with home ownership. Though real estate only goes up 2.5% to 4% per year, (that’s calculating the purchase price to the future property market values.) This real estate benchmark does not tell the whole story. One should consider the Financial Leverage advantage the home owner receives. When one invests 20% down on a house and controls 5 times the value of their cash investment the returns are amplified. Let me say that again, the returns are amplified. Generally speaking, no one buys a house with a 100% down payment. With 20% down, the down payment to equity growth can grow at roughly 15.5% annually (considering a 4.25% fixed 30year mortgage and the average return the first 10 yrs and with removal of the 6.5% for the sale of the home). Thus, look at the down payment growth to the equity value in the home. This is much different from the purchase price vs current market value. I’ll take 12% to 16% equity return all day and twice on Sunday. The S&P 500 gets roughly 10% tp 11% on average.
Thus one should look at the appreciation of the down payment and resulting equity in the house over time.
Don’t you think? (and obviously the impact of selling the house 6.5%) One should also consider that if one lives in a home for 2 of the last 5 years, a married couple can have $500K exempt from capital gains tax. That more than offsets the 6.5% RE broker charges for the sale. No other investment I know provides this capital gains tax exemption.
Since one has to live somewhere and that either pay rent or pay a mortgage and all that entails (Insurance, taxes, tax deductions, repairs etc.), one should do their best to make sure the amount paid for rental expenses, is as equal as possible to the costs incurred on a monthly basis for home ownership. Thus, one is able to keep their cash flow the same if rented or if one owns a home. In the end, one gets the equity kicker and the use of the capital gains exclusion if necessary. It’s like a life insurance policy for your heirs.
It should be noted the leverage advantage diminishes as the loan is paid off and in the later years of the mortgage the overall real estate return flattens. (but in retirement with the house paid off, cash flow is greatly reduced without the mortgage) In the end, it is important to have a well balanced and diversified portfolio. Real Estate is not liquid and therefore it is necessary to diversify and have ample cash reserves.
Veronica says
Hi Geoff – Thanks for the thoughtful and detailed comment. In general, I agree with you that my model is a relatively simple model that doesn’t consider all the fact that buying a house is leveraged (and that its capital gains are not taxed). Though I wouldn’t say they are pure advantages because (1) when you leverage, it can benefit or hurt you depending on how the real estate market goes, and (2) most people only buy and sell their primary residence once in many years.
Regarding (1) Leverage: you can do the same with stocks, technically speaking. You can buy stock options on a margin loan so that when you win, your wins are amplified. The problem is – this comes with a risk. Real estate prices may have gone up in the past decade, and it wasn’t always the case. In 2008, because of leverage, when real estate prices crash, people will lose their homes and have to pay on top of losing their homes, and that is why in 2008, many people had to declare bankruptcy. Leverage goes both ways. People should not buy a house expecting prices to go up the way it has over the past decade.
Regarding (2), You are right – but this applies to only primary residences. Most families buy a home and live there for many years before selling. But in general, you are right. It offsets the taxes by a little bit – only the gains part. But the assumption here is, again, that your home value will increase. This is not a guarantee.
Observer says
Just an FYI – I think the calculator is broken. I see #VALUE in the variable portions.
Veronica says
Can you be more specific? it works fine for me.