I think this post is useful enough that I’m giving it its own page:
With all of the variables between renting a place or buying, it can be hard to decide. If you are going to buy, how much should you put down? Anne and I recently were looking at the exact same decisions. Programming geeks that we are, we created a helpful spreadsheet (it’s shared to everyone, so you might want to download your own copy before playing with the numbers) that lets you figure out which decision is right for you. Let me explain a little bit about how it works:
This spreadsheet calculates, based on your input, your net worth over time, and the amount of money you have lost, both from buying and from renting. On the first sheet are all of the variables you ever need to concern yourself with editing. These are all in blue. Certain related variables are calculated in gray (such as what the PMI you will pay if you put less than 20% down is). In particular, for a given set of fixed costs – essentially your monthly expenses – note that you’ll have a paycheck remainder in gray. The spreadsheet assumes that you’re investing that paycheck remainder into stocks. Money that you’re not investing should be part of the fixed costs, probably in the free spending category. Residential discount is a tax discount that some towns in Mass. give. The real estate appreciation of 5.23% is what the national average for the past 30 years was.
On the second sheet all of the numbers for buying and renting are displayed per month, and on the third sheet, per year. The numbers that you particularly want to pay attention to are in the bold colors: your net worth and your cost of each option. The other columns that you might wish to notice are your stock values for each, since these essentially represent the amount of money you have liquid. While buying will quickly adjust your net worth to be greater than renting, you won’t have as much money to actually use usually, as your cash is locked up in your property.
A couple notes to observe:
We do deduct the commission price of selling from your net worth buying estimate. In other words, at any time, if you’ve bought, you should have more money than shown – you’re just going to pay a fee when you try to access it.
Another issue is that there’s a couple known factors we do not take into account. Primarily, having a mortgage often helps as a tax deduction. However, since our current taxes are so complicated, there’s not any real good way to account for this. Secondly, we don’t raise rent according to any sort of index. If you can find a rent that will stay the same for the next 15 or 30 years, It’s either an incredibly good or an incredibly bad deal, but otherwise the cost of renting is going to be a bit, but not much, higher than it shows as time goes by. Most notably, renting shouldn’t catch up to buying in net worth, as it does with many sets of numbers. Finally, we don’t have any way to adjust the mortgage payments after a set time – instead we assume a fixed mortgage. Mortgages that are adjustable will start having different numbers once they enter their adjustment period (usually after 5 or 7 years).
Something interesting I noticed playing around with the numbers myself: The amount of money you put down leads to two peaks in your net worth. If you put down at least 20% you don’t have to pay any PMI, which, combined with having lower monthly mortgage payments, is a good number. The other peak amount of money to put down is whatever the smallest amount you can get away with is, as you’ll want to put as much of the rest of your current money in stocks, and hopefully will be able to make what you’re losing on PMI payments, plus extra, back in the stocks.
Any other questions, please feel free to ask!