Is it better to rent or buy?

To evaluate whether it's better to rent or own a home, you can use a Rent vs. Buy calculation that compares the total costs of owning a home to the total costs of renting over a certain period of time. A common approach is to calculate the net present value (NPV) of both scenarios, taking into account costs, benefits, and appreciation. Here’s a simplified step-by-step outline of the calculation:

Step 1: Calculate the Costs of Owning a Home

Include the following key factors:

1. Mortgage Payments (principal and interest)

2. Property Taxes (As a realtor, I can grab what taxes look like for your dream home)

3. Homeowners Insurance (put those insurance providers to work in showing you calculations)

4. Maintenance and Repairs (often estimated as 1-3% of the home's value per year)

5. HOA Fees (if applicable)

6. Opportunity Cost of Down Payment (i.e., the return you could have earned if you invested the down payment instead)

7. Transaction Costs (closing costs, realtor fees when selling, etc. Note, realtor fees are responsibility of the seller, not the buyer)

8. Appreciation of Home Value (annual percentage increase in the value of the home)

9. Tax Benefits (if applicable, like mortgage interest deduction)

10. Selling Price/Capital Gain at End of Period (if the home appreciates in value)

Step 2: Calculate the Costs of Renting

Include the following factors:

1. Monthly Rent Payments

2. Rent Increases (projected annual rent growth rate)

3. Renter’s Insurance

4. Savings/Investment (amount you save by not having to make a down payment, maintenance, or other homeownership costs)

5. Opportunity Cost of Investment (i.e., the return on investments you could earn by saving instead of buying)

6. Renting Costs Over the Period (sum of rent, insurance, and lost investment returns)

Step 3: Adjust for Inflation and Opportunity Cost

For both the rent and buy calculations, it’s important to account for inflation and opportunity cost:

• Inflation Adjustment: Future costs should be adjusted for expected inflation, happy to provide an idea of what that looks like)

• Opportunity Cost of Capital: For ownership, this includes the potential investment return from the down payment, while for renting, this includes the return on saved capital.

Step 4: Compare Total Costs

After calculating the total costs of owning and renting over the chosen time horizon (typically 5, 10, or 15 years). Not great with numbers- no need to worry- that is something I can help you with!

• Compare the net present value (NPV) of renting vs. buying.

• If the NPV of renting is less than that of buying, renting is the better financial decision.

• If the NPV of buying is less than renting, homeownership is more favorable.

Step 5: Additional Considerations

1. Time Horizon: Buying typically becomes more cost-effective over a longer time period. Understanding your lifestyle and where you see yourself in a longer time horizon.

2. Market Conditions: Consider current interest rates, property appreciation rates, and rent growth in your area.

3. Personal Factors: Stability, lifestyle preferences, and long-term goals should also influence the decision beyond pure financial metrics.

By comparing the total costs of owning versus renting in this way, you can make an informed decision on whether it's better to rent or buy a home in your specific circumstances.