The Rent vs. Buy Calculator Put to The Test

• October 8, 2010
• 12 Comments

by Joe Marhamati

The question of whether to buy or rent can be an algorithmic nightmare to untangle. The process has gotten much easier, however, since New York Times graphic editors Kevin Quealy and Archie Tse created a Rent vs. Buy calculator that integrates nearly all conceivable factors that go into the decision-making process.

“The tool is an interactive calculator that uses formulas to calculate the year-by-year costs of buying and renting,” Kevin Quealy told UrbanTurf. “It then determines which is cheaper after each year.”

The calculator asks users to input their current monthly rent and the home price they’d likely purchase at, as well as variables like a down payment percentage, probable mortgage rate, annual property taxes, and the rate of home value appreciation and rent increases in their area. What the calculator spits out is a graphical representation of the time it takes for one to break even on their investment, and the return on that investment going forward. The calculator also lets you compare figures across a theoretical number of years lived in the property, so you can see the cumulative savings or loss.

“All the metrics it takes into consideration are inputs on the calculator, so there are no ‘hidden’ inputs,” Quealy explained.

We decided to put the calculator to the test for three hypothetical buyers.

Adrian — 26-year-old teacher living in Logan Circle

Click the image to enlarge

Adrian is paying $1,000 a month for a 500 square-foot studio apartment. He’d like to buy a similar space in the area for $275,000 and knows that he has enough savings for a 10% down payment. He’s preapproved for a 4.75% fixed rate mortgage, and knows that he’ll pay about $1,800 in property taxes annually. It turns out that Adrian will break even on the investment after four years if the property appreciates at 5% and he avoids paying rent at an expected annual 3% increase. If Adrian stays in the property for five years then he’ll save $14,809 over renting, but if he picks up and leaves only to sell his place after three years he’ll have lost $4,067.

Ninette — 35-year-old doctor living in the SW Waterfront

Click the image to enlarge

Ninette, a 35 year-old doctor, is ready to buy a house with her fiancé. They currently rent a two-bedroom apartment together in Southwest Waterfront for $1,750 a month and would like to purchase a three-bedroom home in the $500,000 range near Hill East. They’ve been approved for a 5% mortgage rate and plan to put a 20% down payment on their house, but Ninette notices from looking at comps and talking to her agent that the houses in the part of Hill East where they’d like to buy only appreciate at about 3% a year. Assuming a 3% increase in their annual rent, it would take Ninette and her fiancé ten years to break even on their investment. Staying fifteen years would net them about $62,000, but staying five years less than expected would result in a loss of about $28,000.

Alejandro — 57 year-old businessman renting a one-bedroom

Click the image to enlarge

Alejandro is a 57-year-old businessman would has spent most of his working life in a modest one-bedroom apartment in Southwest, saving year after year so that he could upgrade eventually to a two-bedroom condo near Dupont Circle when he retires. He currently pays just $750 a month in rent, but has saved enough for a 25% down payment on a $750,000 unit with a 4.5% interest rate mortgage. Alejandro estimates that his property will appreciate 5% annually in Dupont Circle based on the appreciation of similar units, but even with his 4% annual rent increases it would take him 23 years to break even on the investment.

Before taking the calculator’s conclusion as the final word on whether or not you should continue to rent or dive in and buy, keep in mind a few things. First, make sure to use the Advanced Settings button in the upper right, which allows you to set even more variables, including condo fees, monthly utilities, and closing costs. Also realize that even though the tool appears on the New York Times website, there is nothing New York-specific about it. Because it allows you to input essentially every variable and cost that goes into home buying or renting, you are able to enter in values specific to your own area. Lastly, approximating home appreciation and rental increases is tough in a time when both can fluctuate significantly from year to year, but the value is crucial. Missing your projected home appreciation by even one percent can cause your return-on-investment schedule to change by a year or more.

That said, by taking into account estimated closing costs, utilities, renovations and maintenance, homeowner’s insurance, and even lost opportunity costs, this Rent vs. Buy calculator is probably the closest thing in terms of an objective second opinion that you can get today.

This article originally published at http://dc.urbanturf.com/articles/blog/the_rent_v._buy_calculator_put_to_the_test/2554

12 Comments

1. Barry said at 8:45 am on Friday October 8, 2010:

   Great article. I have used this tool a few times over the last two years and it has been very helpful.

1. Mike said at 9:40 am on Friday October 8, 2010:

   Here’s the link to the calculator if you want to try it for yourself.  It’s one of the most comprehensive ones out there.

   http://www.nytimes.com/interactive/business/buy-rent-calculator.html

1. BDG said at 9:44 am on Friday October 8, 2010:

   The hypothetical buyers really put things in perspective…for better or for worse.

1. J said at 9:51 am on Friday October 8, 2010:

   5% annual increase? I think that’s rather optimistic. That would mean a $400k place would be worth $510k after just five years.

   Just because house prices have skyrocketed in the last decade or so doesn’t mean it’s a historical trend.

   I feel the same way about the stockmarket (6-8% per annum is an oft-cited figure that’s ridiculous, in part because it often excludes the stock markets’ worst years).

   I think it’s worth keeping that figure in mind as a *variable* when plugging figures into this calculator.

1. Justin Morton said at 10:11 am on Friday October 8, 2010:

   Nice article, but your price appreciation is way off. With the elimination of the Home Buyers Tax Credit, homes are set to depreciate for the next few years, not appreciate.

   In addition, rents have remained stable the last couple of years, and are projected to only increase at about 1-2% for the next several years.

   Buy home if you want to own a home. But don’t buy a home for investment purposes. The value is not there yet, and probably won’t be for another couple of years.

1. Lauren said at 10:21 am on Friday October 8, 2010:

   The other major variable is the condo fee. When I added in a $200/month fee to the studio scenario (keeping the other variables the same) the break-even point moved to 5 years, where buying came out with a $700 savings.

1. Disagree said at 10:22 am on Friday October 8, 2010:

   Justin,

   You can’t generalize about home appreciation. Maybe in the national aggregate homes will depreciate, but that’s not what you should plug into the tool. You should estimate what you think will happen in your local market. Or better, your specific neighborhood.

   If you were to buy in the H Street Corridor, for example, your home seems very likely to appreciate. (By how much is another question.)

   Same with rents. You say they’re projected to increase by only 1-2% for the next several years. I don’t see that in DC. Rental supply is extremely tight. And in just the last year, we’ve seen buildings go from desperately offering 3 months free rent, to 0 months in free rent. That’s a rental increase well over 1-2%.

1. Anon said at 10:56 am on Friday October 8, 2010:

   Has anyone seen any articles/information on the expected appreciation of homes in Eastern Market?

1. JT said at 12:29 pm on Friday October 8, 2010:

   Am I off-base here or did this entire exercise forget one important factor?—Life Improvement?  Especially in the last instance—shouldn’t there be a factor for going from a small 1BR in SW to a 2BR in Dupont Cirlce?  If you are using the rent vs. buy calculator, you need to be comparing apples to apples.  So, rent for a 2BR in Dupont versus buying a very similar 2BR in Dupont at purchase price.  The NYT calculator doesn’t allow for “upgrading.”

1. jag said at 2:10 pm on Friday October 8, 2010:

   Hey JT, I have that exact problem (as do most people, I’d assume).  What I try and do is figure out from Zillow what the place I’m looking at (or a comparable place) would rent for and then just plug that number in. For condos, it’s pretty easy to do if you’re familiar with the neighborhood.

1. thing said at 9:54 am on Saturday October 9, 2010:

   The thing I don’t understand is that if you’re assuming housing prices will increase by 5 percent annually, you’re assuming that housing prices will double in 14 years (using the Rule of 72). So you’re assuming that every person who buys a $400,000 condo will be able to sell it, on average, for $800,000 is a little more than a dozen years. Is that realistic?

1. Paul said at 10:23 am on Saturday October 9, 2010:

   Have any of the people making comments questioning the 5% annual appreciation rate owned property in DC for at least five years? Because I have, and my home has appreciated at at least that rate. Also, if you have followed the housing price stats in DC over the last six months you will find that prices have been rising faster than almost anywhere else in the country.

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