Buying Beats Renting – Part 1

Some research by Trulia caught my eye recently. It presented an in-depth analysis of buying/owning a home versus renting. It did this analysis for dozens of markets across the country and concluded that buying beats renting in most cases.

 Yes – these are Kumquats

Unlike so many of the articles I see on this topic, I thought Trulia did a valid kumquats-to-kumquats comparison (apples-to-apples is too trite of a phrase so I thought I’d change it up a bit).

For one thing, the Trulia analysis compared buying/owning to renting an equivalent property. Many analyses of these kinds will pit buying a 3 bedroom, 2 1/2 bath single family home with a 2-car garage against renting a two bedroom apartment.

Their analysis also accounted for all the extra costs of owning such as insurance and maintenance. In addition, the Trulia research pointed out that the results depend on at least three variables: (1) Interest rate on the mortgage, (2) Your income tax bracket and (3) How long you stay in the house.

And there is good news in here for Denver area home buyers — buying is an excellent value compared to renting in our Colorful Colorado paradise.

Here are some numbers for the Denver area: Buy a home at 4.5% interest rate when you are in a 25% tax bracket and stay there for seven years. You will pay 35% less from buying instead of renting the same house.

Bump the interest rate to 5.5% and shorten the stay to just three years when you are in a 15% tax bracket and owning is still 10% cheaper than renting.

And yes — for you accountants and engineers and economists out there (I’m a former engineer), the Trulia methodology does use Net Present Value in their calculation so that they account for the time value of money.

As good as it is, there is still one variable that the Trulia article is not letting us adjust and it can make the buy vs rent decision even more favorable for buying. Check it out in Part 2 of this series.

Play around with the Trulia Interactive Calculator. You can adjust interest rate, tax bracket and length of home ownership. Then point to the Denver circle and you’ll see a summary of buy vs rent advantage.