In 2000, billionaire Nicolas “the homeless billionaire” Berggruen traded his New York apartment and private island for continual visits to 5-star hotels. This was likely a lifestyle rather than an investing choice, but it can be seen as an extreme version of the analysis I started in my last post on buying or renting.
When I first set about analyzing the issue, I wanted to give a definitive answer in favor of one side or another. However, there are too many factors at play. I’ve created a flexible excel model that allows your inputs to compare the payoff from buying and renting. Download it by clicking here:
Buy vs. Rent Calculator 10.26.12
The model compares the projected value of two portfolios:
- House equity — House Value less long-term debt.
- Investment portfolio — The expense saved from renting instead of buying is instead contributed into a stock market portfolio.
All assumptions can be adjusted on the third sheet. Sheet 2 gives a detailed look at the cash flows on all projected months. The first sheet graphically shows the value of each portfolio over time.
By default, I have a fifteen year mortgage analyzed for 30 years. With the default assumptions, the stock market portfolio can easily pay for the saved rent after the house is paid off. However, the appreciated value of the house makes the first portfolio worth far more. With the default specification, “buy” beats “rent” under every time horizon. However, if your individual situation merits different assumptions, then the forecast may change.
If you play with the model, you’ll quickly realize that it is extremely sensitive to changes in the house appreciation rate. If you are confident you’ll experience capital gains, then buying is usually a solid investment. However, you shouldn’t rush into a home purchase just because an excel model showed that buying was marginally better. If you get stuck in a bad location and are unable to sell the house for a profit, then the decades of reduced liquidity were for nothing.