The Rent Versus Buy Calculator Put to the Test, Part II

• March 1, 2013
• 11 Comments

by Mark Wellborn

A few years ago, graphic editors Kevin Quealy and Archie Tse created a Rent vs. Buy calculator for The New York Times that has become perhaps the most-used internet tool when people are attempting to make a calculated decision to purchase a home.

“It is an interactive calculator that uses formulas to calculate the year-by-year costs of buying and renting,” Kevin Quealy told UrbanTurf in a 2010 article. “It then determines which is cheaper after each year.”

Given that it has been a little over two years since UrbanTurf put the calculator to the test, we decided that enough has changed in terms of the housing market in the DC area that it made sense to revisit its results.

Here is how the calculator works. Users input their monthly rent and their desired home price point, in addition to a slew of variables like down payment amount, probable mortgage rate, property taxes, condo fees and the rate of home value appreciation and rent increases in their area. The calculator then creates 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.

The issue that we discovered with the calculator is that it does not allow you to enter a variable home price appreciation or rent increase percentage. In other words, if a user enters a home price appreciation rate of 5 percent a year, that level of appreciation is assumed for the entire period of the loan.

Still, we went ahead and tested it out for a potential buyer and provided three different scenarios, based on varying home price appreciation and rental rate changes that take into account the fact that home values and rental rates will rise and fall over the years.

Here is our potential buyer:

Ariel — 32-year-old consultant living in Logan Circle

Ariel is paying $2,600 a month for a 1,100 square-foot two-bedroom apartment with no roommate. She’d like to buy a comparable space in the area, where similar two-bedrooms are fetching $625,000. She knows that she has enough savings for a 10% down payment, and is pre-approved for a 30-year, fixed-rate mortgage at 3.9 percent.

Here are some of the other variables that we incorporated into the scenarios below:

• Condo fees: $300 a month
• Annual renovation costs: 0.5 percent of the purchase price
• Annual maintenance costs: 0.5 percent of the purchase price
• Homeowner’s insurance rate: 0.5 percent of the home’s value

Scenario #1

Our first scenario assumes a rather modest home price appreciation of 2 percent a year, and a rental rate increase also of 2 percent a year. Assuming these numbers, it would take Ariel about nine years to break even on her investment, according to the calculator. A graphical representation of the rent versus buy breakdown for this scenario can be seen below.

Click to enlarge.

Scenario #2

Our second scenario assumes a home price appreciation rate of 3 percent a year, and a rental rate increase of 4 percent a year. Assuming these numbers, it would take Ariel about five years to break even on her investment, according to the calculator. A graphical representation of the rent versus buy breakdown for this scenario can be seen below.

Click to enlarge.

Scenario #3

Our third scenario assumes a home price appreciation rate of 4 percent a year, but a rental rate increase of just 2 percent a year. Assuming these numbers, it would take Ariel about four years to break even on her investment, according to the calculator. A graphical representation of the rent versus buy breakdown for this scenario can be seen below.

Click to enlarge.

This article originally published at https://dc.urbanturf.com/articles/blog/the_rent_versus_buy_calculator_put_to_the_test_part_ii/6709

11 Comments

1. Real Estate said at 4:06 pm on Friday March 1, 2013:
   2-4% appreciation in the housing market in this economy? Optimistic.

1. Chris said at 4:56 pm on Friday March 1, 2013:
   I have used the calculator a number of times when considering buying and found it helpful. Prices went up 10 percent in dc alone in last year so 2-4 percent appreciation scenarios over time seem reasonable.

1. ap said at 6:27 pm on Friday March 1, 2013:
   to the comment above, maybe that applies nationally, but the DC market has statistically been one of the hottest in the country for the past couple years. 2-4 seems conservative in the District, where many areas have "taken off" and enjoyed double digit increases year over year for the last couple. Sequestration notwithstanding...

1. Zesty said at 6:37 pm on Friday March 1, 2013:
   "Prices went up 10 percent in dc alone in last year so 2-4 percent appreciation scenarios over time seem reasonable."...Basing future growth in housing prices based on last years price appreciation is not a best practice. You should look at household formation trends, employment trends, rental pricing, etc.

1. David said at 7:38 pm on Friday March 1, 2013:
   10% down payment Is she paying PMI? That could be an additional couple hundred per month.

1. Logan Lady said at 9:23 pm on Friday March 1, 2013:
   Can you provide a link for this calculator so I can try it myself?

1. kob said at 9:26 pm on Friday March 1, 2013:
   I think these calculators are useful exercises, but they don't measure the intangibles or account for risks. The intangibles involved rent vs. buy are well known. But what's hammered me in the past (in the 1980s and more recently) with home purchases, are the macro risks. Yes, things look good for now. But these calculators won't give you any guidance on how to assess the ongoing pullback in defense spending. That's going to take a toll on this region.

1. Mary said at 1:35 am on Saturday March 2, 2013:
   This is a great tool. Is there a link that I can drive buyers to?

1. Caleb said at 1:40 am on Saturday March 2, 2013:
   A useful tool. However, your projected expense of $41,000 in maintenance and renovations over 5 years could be rather high depending on the property. I purchased a brand new 2br condo in Logan back in 2009 and have spent maybe a couple hundred dollars on such expenses replacing air filters and smoke detector batteries.

1. Mike said at 2:23 am on Saturday March 2, 2013:
   @Logan Lady and @Mary - The hyperlink is in the very first sentence of the article: "Rent vs. Buy". Click on it and you'll be able to run your own scenerios.

1. will said at 6:06 pm on Friday December 6, 2013:
   L.A., Orange County, (20% YoY) Vegas, Phx have seen double digit gains. Of course, past does not indicate future. But in highly desirable areas,the appreciation will be greater than a low-income working class area