I’d like to start by saying owning a home is not for everyone, and some homeowners get very unlucky leaving a bad taste in their mouth. With that said, if you’re considering buying a home vs renting a home, buying beats renting every time in the long run.
To prove this, I’ve decided to look at hypothetical numbers that show cost of ownership for a homeowner vs renting going all the way into retirement years. I’ve also figured opportunity costs and how that could impact long term gains if invested.
For the renter, I’m starting with $1,200 a month in rent. Rents increase over time, so every 3 years we’ll increase the rent by $100 per month.
For the home owner, I’m assuming a purchase price of $200,000 with taxes and insurance equal to $1,200 a month and a $40,000 down payment. We’ll also need to consider the fact that property taxes only go up.
A LOOK A 30 YEARS OF RENTING
Renting $1200 for first 3 years ($43,000),
Goes up to $1300 for 3 years ($46,800)
Goes up to $1400 for 3 years ($50,400)
Goes up to $1500 for 3 years ($54,000)
Goes up to $1600 for 3 years ($57,600)
Goes up to $1700 for 3 years ($61,200)
Goes up to $1800 for 3 years ($64,800)
Goes up to $1900 for 3 years ($68,400)
Goes up to $2000 for 3 years ($72,000)
Goes up to $2100 for 3 years ($75,600)
This is now the 30 year mark. The Renter has paid $593,800 and we still have 12 years until retirement if we started at age 25.
At 30 years the homeowner’s house is now paid off. They only have taxes/insurance moving forward, yet the renter's rents are still only going up. The homeowner has paid an estimated $450,000 total when figuring in increasing property tax.
WHAT DO THE NEXT 12 YEARS LOOK LIKE?
With the homeowner’s house paid off, let’s take a look at how the numbers stack up.
Home owner is paying $500 a month for 5 years ($30,000)
Home owner is paying $550 a month for 5 years ($33,000)
Home owner is paying $600 a month for 2 years ($14,400)
Rent goes up to $2200 for 3 years ($79,200)
Rent goes up to $2300 for 3 years ($82,800)
Rent goes up to $2400 for 3 years ($86,400)
Rent goes up to $2500 for 3 years ($90,000)
So all in, over a 42 year period the home owner paid $527,400 and his home is worth $460,000 having kept up with 2% inflation rate.
The renter after 42 years has paid $932,200 and has NOTHING to show for it.
But what if you invested the original $40,000 down payment at 7% over 42 years instead of buying a house??? That's $685,000!
Well first of all, that still means you’re $247,200 in the hole and have nothing to show, vs the homeowner who paid $527,000 over 42 years and has a $460,000 house to show and a housing payment 1/5th of your rent. But we also need to figure what if the homeowner was investing the difference between their housing payments and the renter’s payments.
In year 3 the homeowner would have started investing $1,200 a year as that’s the difference between their payments and the renter’s payments.
Year 6 they’d be investing $2,400 a year.
Year 9 they’d be investing $3,600 a year.
Year 12 is $4,800 a year.
Year 15 is $6,000 a year.
Year 18 is $7,200 a year.
Year 21 is $8,400 a year.
year 24 is $9,600 a year.
Year 27 $10,800 a year.
Year 30 is $21,000 a year. (the year the mortgage is paid off)
Year 33 is $22,600 a year.
Year 36 is $23,800 a year.
Year 39 is $25,000 a year.
Year 42 is $26,200 a year.
I'm not going to even try to figure out how compounding interest works its magic on those numbers over time. I did start doing the calculations and it approaches $2,000,000. Even if we say it averaged $7,000 a year for 42 years that’s over $1,800,000 so I’m sure we’re in the right ballpark.
Where do we end up?
The home owner has paid $527,000. They own a $460,000 home and are paying $600 a month to live in their home moving forward. They also have around $2,000,000 in investments.
The renter has paid $932,200 over the past 42 years. They do not own their home and need to continue to pay $2,500 a month for their rental. They also only have $685,000 in investments from the investment of the original $40,000 they didn’t use for a down payment.
We also need to take into consideration no other costs were considered. Owning a home over 42 years is going to require at least 1 new roof, a hot water heater, HVAC replaced, an updated kitchen and a number of other costs. Even if this costs $100,000 the home owner is still miles ahead of the renter.
OTHER THINGS TO CONSIDER
Nothing is going to be this cookie cutter. Every situation is different. If you have a job that may require you to move a lot, you could be better off renting. Realtor fees, moving and storage expenses can really chew into gains. Older homes can come with a lot of additional expenses that can add up over time.
Are you handy? If you don’t know how to turn a wrench home ownership can get very expensive. Easy fixes like changing out a sink faucet may only cost a DIY guy $30, if you call a plumber or handy man you could be looking at $200. Again, these things can really add up.
With all things considered, buying is still going to be the right financial choice 99% of the time.
Comment below and let me know your thoughts.
