Buying Makes You Richer Than Renting

We’ve commented favorably in the past on the Trulia calculator that helps you understand the true costs of buying versus renting a home.

Now the New York Times (NYT) has weighed in with their version of the rent/buy calculator.

Bottom line: Second versus, same as the first. The NYT calculator gives a similar answer as Trulia. Buying beats renting by a wide margin right now in metro Denver.

We plugged in a typical scenario to both calculators — a $300k home at 4.5% on a 30-year fixed rate loan owned over a seven-year period. Both programs require info on 15 other assumptions including things like annual real estate taxes, costs of maintaining a home and so forth.

The net monthly cost of owning this home over seven years is:

• • $1,121 per month according to the Trulia calculator

• • $1,134 per month according to the New York Times calculator

So these two sources come up with very similar answers to the net cost of owning a home.

What would it cost to rent a comparable house? We found some rentals on Zillow of $300k homes that met all the other parameters that we plugged into the calculators. The rental rates are running $1950 to $2200 per month.

Let’s see – own for around $1100 per month or rent for more than $2000 a month? That is over $75,000 more money in your pocket after seven years if you buy instead of rent! Seems like the proverbial no-brainer.

Keep in mind that the net cost of owning a house is not the same as your monthly payment on that house. The net cost takes into account things like appreciation on the home over time, the tax deductions that you take and other items that reduce the month-by-month cost of buying.

However, owning is cheaper than renting even on a monthly cash flow basis. The $300k home we are discussing here would have a total monthly payment of $1,575 per month for principal, interest, taxes, insurance and HOA fee (at 20% down). Even with only 5% down, the monthly payment would be around $1900 per month.

As a result, you will not only have a lower payment each month when buying but you’ll also have a much better long term financial gain.

We’ll be adding many more posts on the rent versus buy matter in the next few weeks. Click on the Rent vs Buy tag to explore all the posts on this site dealing with this issue.