The Rent Versus Buy Debate: A Local Perspective

• August 26, 2010
• 11 Comments

by UrbanTurf Staff

A DC area brokerage recently put together a rent-versus-buy analysis based on rental and home price information of four Northwest DC zip codes. The comparison of tenant versus home owner analyzed the average rental rate ($1,887 a month) against the average property price in 20008, 20009, 20015 and 20016 ($362,383), and projected out what those payments would be over five years. The chart below compares five-year payments on a 4.42 percent FHA loan, a 2.75 percent 5/1 adjustable rate mortgage and total rental payments over five years.

Click the chart to enlarge

The chart clearly puts forth the idea that with either of the loan options, buying is the better bet to save money and build equity in the long run. While it is important to keep in mind that this is a real estate brokerage putting out this analysis (and that a number of key metrics have been left out), the chart does include disclaimers regarding growth rates and rental projections. Also, conventional financing was not included in the analysis.

However, the big factor here is the growth in value of a home, and despite the fact that the rest of the country’s housing market seems to be down in the doldrums, home prices in the DC area look pretty good these days.

This article originally published at http://dc.urbanturf.com/articles/blog/the_rent_versus_buy_debate_a_local_perspective/2423

11 Comments

1. Simon said at 9:19 am on Thursday August 26, 2010:

   I would like to see this mythical property along Connecticut Avenue that rents for $1900 a month but is listed for $360,000.

1. Gerald said at 9:23 am on Thursday August 26, 2010:

   Interesting comparison. It should also be pointed out that 30 year-mortgage rates are now at around 4.4%, so going that route would lessen your payments even more.

1. Gerald said at 9:34 am on Thursday August 26, 2010:

   @ Simon—

   Fairly close

   http://www.redfin.com/DC/Washington/3616-Connecticut-Ave-NW-20008/unit-401/home/9984547

   http://washingtondc.craigslist.org/doc/apa/1918962439.html

1. Simon said at 9:34 am on Thursday August 26, 2010:

   I would encourage anyone considering the “rent v. own” question to rely on a credible online calculator rather than what this brokerage put together to assess the specifics of their situation.  For example, http://www.nytimes.com/interactive/business/buy-rent-calculator.html allows one to make more precise assumptions about condo fees, insurance, maintenance, and the like than what is reflected in the chart above.

1. Simon said at 9:45 am on Thursday August 26, 2010:

   Thanks Gerald.  These two units actually nicely illustrate my point.

   If you plug the listing data from 3616 into the Times’ online calculator, and then compare it to the rental data from 2501, and assume a 2% increase in both home value and rent, then buying only becomes better than renting in year 6. 

   (This assumes, of course, that the units are the same.  In fact, even though its smaller, I suspect that if it were a condo the unit in 2501 Porter would list for more, perhaps much more, than the unit at 3616 Connecticut, and probably carry a higher fee, too, given the amenities in the Porter building.  This would drive the break even point for purchasers even further into the future.)

1. april said at 10:15 am on Thursday August 26, 2010:

   The Cleveland park unit for sale is 200 square feet bigger than the rental unit. Plus the times calculator is quite suspect. I used to use it and then realized after doing my own calculations that it doesn’t really take into account local market conditions. DC is a different market than than other big metropolitan markets, making the buy case stronger than renting in a number of properties I have compared.

1. reader said at 10:16 am on Thursday August 26, 2010:

   This comparison is so misleading that I am surprised (and somewhat disappointed) that you decided to post it.  The examples specify downpayments of less than 20% and yet exclude mortgage insurance from their comparison.  This seems to be be for no other reason than to skew the comparison in favor of owning.  Not sure about the ARM, but with FHA you can get a pretty close estimate as it’s a percentage of financed amount.

   Also, as far as I can tell, they don’t include condo fees or saving to cover the cost of repairs and maintenance in a single-family home.  I will grant that these are much harder to estimate than mortgage insurance, but they are not trivial expenses.  To not even mention their existence (or exclusion from the calculation) is definitely a disservice to folks who want to compare which option is better for them.

   It’s unfortunate that this particular broker or brokerage decided to blatantly mislead rather than inform.

1. on the market said at 10:34 am on Thursday August 26, 2010:

   Thanks reader for the above comment. Let’s not forget that this blog as well as other propaganda is put out by people whose livelihood depends on people purchasing homes.

1. Janson said at 11:03 am on Thursday August 26, 2010:

   #reader, right on! Also, no closing costs on the purchase end, and no commissions on the back end. The maintenance is a significant adjustment and NO CONDO or COOP FEE!?

   And the 28% tax bracket (which ostensibly starts at an income of $82,000, but really means $100,000+ after standard deductions) should be explicit. Most middle class effective tax rates are closer to 20%.

   And what about the opportunity cost of the down payment? If you put down $35,000 for the purchase, the renter should get the interest on that same $35,000 credited for the 5 year period.

   This is terrible.

1. SL said at 12:58 pm on Thursday August 26, 2010:

   For those who don’t choose to buy, the major upside is that you don’t have any home maintenance costs. Especially if you buy an older home (in my case, a 100-yr-old rowhouse) these costs can be significant. Before I bought my first property I had a lot more disposable income. Now I spend that money on repairs to my rental property and improvements to my house. I think it will pay off eventually, but I never realized how expensive it could be to maintain a house.

1. Simon said at 1:20 pm on Thursday August 26, 2010:

   April:

   What have you noticed is inaccurate about the Times calculator?  I’ve compared it to similar calculators and found generally consistent results, so long as the inputs are the same.

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