To Rent or To Buy? That is the question.

From the "Real Estate Talks" forum, I came across a useful spreadsheet model to show what happens in a falling market.

One often hears people say "It is always a good time to buy. After all housing always goes up in the long term and you are throwing your money away on rent.” Is it is better to buy now or rent for a few years with the intention of buying later??

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Roger VI made this model based on some basic assumptions:

- renter pays $2500 per month rent- owner pays $2500 as mortgage payment during entire mortgage
- both have saved 100K- 500K is the price of the property
- constant mortgage rate of 5.75%
- renter pays rent out of 100K savings until property is purchased
- savings interest, property maintenance, taxes and utilities are not considered

CONCLUSIONS

With a 5% drop the “buy now” purchaser comes out ahead. At 8% it is a tie and at 10% and 12% drops the patient renter comes out way ahead. For example with a 10% annual price drop:

- Former renter ends up mortgage free two years earlier
- In 2015 & 2020 former renter owes much less on outstanding mortgage

The renter is much better off than the model suggests if you consider interest on the savings and that the “buy now” owner was paying property taxes and maintenance for one or two years while the renter was not. But investment return on savings has been left out of the model to avoid debates on what its value should be. In any case, it does not make enough of a difference to affect the results of this model.