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Renting vs. Buying - The Real Story

What is more economical, buying or renting? The Redwood City 650Pro will answer these questions on a weekly basis.

Dear 650Pro,

I have been renting for a few years now and can’t get past the idea that I am just throwing my money away.  Can you help me figure out if it is better to keep renting or to buy, especially since housing prices have dropped considerably in the past few years?

Renter Rita


Hi Rita,

No problem!

There are a number of factors to consider before making your decision.  First and foremost is: how long to you plan on staying in your next (or current) home?  As I advised last week, “Do not buy unless you know you can afford it should your worst case scenario happen (separation, unemployment, etc.), and do not buy unless you can plan on living in that home for more than five years.”  These two items are the biggest considerations you need to work through before signing another lease, or in this case, a purchase contract.

Once you have come to that conclusion, we can work through the numbers to help you figure out which is the best financial decision for you.  One great (and easy) comparison calculator can be found on the Ginnie Mae website:  http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp?

Let’s work through your calculations: You said you are paying $2200 a month in rent for your 3 bedroom/2 bath home.  If you can afford 10% down payment toward a $650,000 home, here are the numbers for a 30 year fixed rate mortgage at 5%, if you plan on staying in your next place for ten years.  This also assumes a yearly property tax rate of 1.15% and a yearly home value increase of 2%.

The Calculations:

Rent Buy Price of Home After 10 Years Appreciation -- $792,346 Remaining Loan Balance after 10 Years -- $475,914 Equity Earned -- $316,432 Tax Savings (at 28%) -- $102,830 Average Monthly Payment over Time $2,448 $1,566 Total Payment over 10 Years $293,760 $187,923


Which is Better?

From this example, we can see that over a ten year period, you will pay $105,837 more if you continue to rent instead of buying.  This doesn’t, of course, take into consideration and repairs, maintenance, or upgrades you will have to put into the house, but hopefully anything you upgrade will also add to the value of your home at the time you decide to sell.

So Rita, in my opinion, based on your current rent and what type of home you would want to buy, you would be better off buying in this case.  You can lock in a low interest rate at the moment, get into a home at or near the bottom of the market and should end up saving money in the long term.  But remember:  Be sure you can afford that house if the worst case scenario is to happen!

Happy House Hunting!




Brian Ayer is a Realtor® with Intero Real Estate and offers his professional advice in the Patch Real Estate section.  For questions or a consultation, please email Brian (bayer@interorealestate.com) or visit www.650pro.com

Steve Hayes May 06, 2011 at 04:10 AM
Historically, investing in real estate has been a very good choice. However, the model you have presented needs to be updated. Given your set of assumptions, the Buy ten year payments is actually higher than the rent alternative - not less. If you buy the house the average monthly outflow would be close to $4000 (prin, int and prop taxes) and the after tax (income tax) figure would be around $3000. A home buyer would do well on the appreciation of equity but the average monthly payments would be higher than the rent alternative.
Brian Ayer May 18, 2011 at 06:40 PM
Thanks for your comment. You are correct in the short term based on monthly payments, but the calculator takes into account appreciation and averages that over time. Again, this is a simplified calculator that can be found online and any questions of affordability should be directed to your preferred lender.


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