Monday, November 12, 2007

Rent Versus Buy Calculator

Millionaire Mommy put a link to this fantastic calculator to help you decide if it's in your best interest to continue renting or to buy a home. For her, it makes more sense to continue renting, but every situation is unique.


I just bought a new home a year ago, and I input my information based on that, using actual taxes, fees and insurance, to see if it would have been smarter for me to rent. Not that it does me a lot of good now, but hey, knowledge is power, right? The first time I did it, it said it would take me five years to break even, which is fine since I expect to own it for fifteen years. But then I realized that the default rent amount they're using is ridiculous. I could probably rent something for that much if I lived alone, but I sort of like my husband and kids, and for all of us to live in something comparable to our house, it would cost almost twice as much as the amount I initially used.

One other thing, obviously Millionaire Mommy is a savvy stock investor -- I'm not so comfortable with the stock market. I understand how the real estate market and financing works, and have been able to invest wisely over the years. My stock market investment strategy is more akin to "hoping for the best," so I didn't give myself as generous of a return as she did.


Anyway, when I re-ran with actual figures and a 7% stock return rate, it said I'll break even in 2.1 years (I also used a conservative 4% real estate appreciation rate). But what's more interesting then that is that after 13 years my monthly housing expense will be less if I own than if I rent. Furthermore, over 30 years the equity in my home will be worth triple the amount that I might have earned in the stock market. At which point my mortgage would be paid in full and I could either live monthly payment free, sell, invest the equity elsewhere and use it to pay rent, or live in my house for free and obtain a reverse mortgage to support me until I can no longer live independently.

The bottom line is there are many ways to make money and build wealth. Being a doctor is a good way to make a lot of money unless you're a germophobe and can't stand to be around sick people. Being an engineer is a good way to make a lot of money unless you're not very analytical or good at math. Investing in the stock market is a good way to make money, but it doesn't hurt to diversify with a home or two either. To paraphrase Warren Buffett, the best way to make money is to invest in something you understand.

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3 comments:

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