Housing: Buy or Rent Calculator Part 1 of 2

Many Americans allocate the majority of their household’s assets into their home. Deciding whether to rent or buy isn’t just a lifestyle choice, it’s an investing decision that should be approached with as much caution as choosing the right stock.

The primary benefit of buying is that you retain the principal of your mortgage payments. All rent money is sacrificed to the landlord. Additionally, you might profit from any appreciation in housing prices.

Renting, however, is not without its benefits. Renting requires no down payment and is usually substantially cheaper per month, even before considering the additional expenses of home ownership (maintenance, insurance, HOA fees, property taxes, etc). Assuming one was financially secure enough to afford the house, the additional savings from renting can instead be placed into another investment, such as the stock market or a personal business, from which one might expect a higher return.

While higher returns from the market aren’t guaranteed, as 2008 showed us, neither is house price appreciation. Even in normal times when house prices are steadily marching upwards, house prices in certain areas may be drastically declining. Furthermore, while the median house sold has increased in price over the past five decades, the median house sold has also become larger, newer, more modern and more comfortable. Individual houses owned by a single owner become larger and more modern only after large capital expenditures, and they never become newer.

But even if the returns of the stock market might be higher with less overhead, that doesn’t mean that one will make more money from investing in the stock market. Real estate is not only an investment, it is a leveraged investment. A 2 percent annual house appreciation is applied not just to the down-payment but to the entire value of the house. Most Americans cannot achieve that level of leverage in the stock market. As long as the house value increases, it is a definite benefit.

Considering all of these factors, is home ownership a worthwhile investment? This is a quantitative question that I can’t answer with qualitative arguments. In my next post, I’ll share an excel workbook that you can customize with your specific situation.