The Rent-Versus-Buy Debate—It’s not a Simple Formula

Some of the most impassioned comments I’ve read are on those posts making the case either for or against the long-term advantages of renting versus owning. That argument, like so many others, can be weighted in either side’s favor depending on biases and assumptions made. Perhaps more than any other decision, buying a home combines deeply personal quality of life and life planning issues as well as substantial financial considerations and multiple projections of what the future may hold. It’s a daunting task to be sure. 

That said, you have to start somewhere and an online calculator is as good a place as any to begin the journey—as long as you understand that is really is just a starting point. Every projection requires an educated guess, and even small changes in your assumptions can lead to significant differences in the results over time. So let’s get to it!

Rent vs. Buy: Factors to Consider

  • How much will your rent increase over the same period of projected home ownership?
  • How much will future and current repairs cost you as an owner?
  • Are you a saver and investor other than forced savings for a home?
  • The potential return you may generate on a down payment if invested instead of being used to buy a home—would you invest it? 
  • Total home price appreciation over the period of ownership
  • Mortgage interest rates, at purchase and in the future—will you be able to refinance later?
  • Property taxes in the area you are buying, which vary dramatically by state
  • Total inflation over the same period—traditionally, real estate has been viewed as one of the best hedges against inflation 

The default economic assumptions built into the sample rent versus buy calculators below are open to debate, but note that they can be adjusted as one runs different scenarios. It can’t be overstressed—small changes in assumptions = huge differences over time.

The trickiest part of calculating a realistic rent versus buy equation is that they’re largely based on predictions, including projecting the home price appreciation rate and rental cost changes into the future, or guesstimating interest rates. That makes comparing exact financials of renting versus buying over time tricky, with a number of complicated and volatile factors.  

While anyone can plug in a few numbers to an online calculator, remember that any answer generated is based on what might happen in the future. It’s helpful to review current market conditions and economic factors, as well as to look to past trends. There is no crystal ball and again, these calculations should be considered an educated guess. The smartest approach is to run a few different scenarios, tap a qualified financial advisor, mortgage broker and real estate expert to guide you on what projected costs a home might run you in the near and long term and where long term appreciation trends are pointing. 

A Word on Homeownership as a Wealth-Building Strategy

Regardless of whether you ultimately choose to rent or to buy, it’s worth pointing out that homeownership for the majority remains the best path to wealth building. Buying a home is the largest or one of the largest financial transactions in one’s lifetime, and over the long term, has more often than not proven to be a very wise investment, thanks to factors such as:

  • Long-term appreciation trends
  • Leverage
  • Fixed-rate mortgage that assures stability in housing costs
  • The “forced savings” effect that increases home equity as the mortgage is paid down
  • Potential tax deductibility of some costs relating to homeownership
  • The rental property option
  • Being able to pay your home off so only maintenance costs remain

The Bottom Line

As we stated above, buying a home is a deeply personal choice. Your quality of life, life-planning considerations, and significant financial projections are involved. It’s something that only you can evaluate based on your unique circumstances, plans, priorities, and your vision of the future.  

If you need help troubleshooting your assumptions, whether it be rental projections, repair projections or appreciation trends, you know where to find me. I’ve found homeownership can be a wealth of opportunity and while I strongly believe in homeownership as the most accessible path to wealth, it truly isn’t for everyone. Feel free to use me as a sounding board! I buy, sell and hold real estate in California and Nevada.

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