Rent vs Buy

Lawrence

 

This post introduces an Excel workbook I developed to try to figure out whether, from a financial standpoint, I should rent or buy a home in the next “x” years (e.g. five or six years). After receiving some feedback from some friends, I’ve expanded the workbook to enable it to compare numerous different Rent-vs-Buy situations.

Obviously there are many non-financial reasons that one might want to rent or buy a particular home; this workbook does not attempt to incorporate these, very valid but  subjective preferences.

This workbook is predicated on the idea that households are constrained with regard to their wealth. In particular, consumption crowds out investment and vice versa. For most transactions, this is obvious and the tradeoff is straightforward. Housing, however, is a more complicated good, since it can serve as BOTH a consumption and an investment good. In addition, since it generally comprises a substantial portion of household budgets it is important to consider the numerous implications (opportunity costs) that a financial decision of that magnitude entails. This analysis approximately compares the CASH-EQUIVALENCE of two decisions (rent vs own), i.e. after living in a home for a period of time, what is the financial position of a person as they leave the home (either selling or ending a lease).

The workbook seeks a balance between being comprehensive and flexible without being overly complex.

Please use the comments to post questions or comments. I welcome any and all questions and comments regarding this tool, and am particularly interested in any apparent errors, or user perspectives on areas that appear overly confusing.

Disclaimer: This workbook was created for personal and academic use only, it is not intended to provide specific financial advice.

  • Updated 5/25/2017: Original publication
  • Updated 5/26/2017: Added consideration of long-term capital gains; fixed a small issue of expense double-counting for the home-owner; fixed an important double-counting of the investment for the renter.

 

To download the current Rent-vs-Buy Excel sheet, click here.

 

Other related resources:

  • New York Times article on the subject (and their similar tool). The NYT article addresses several of the perspectives and ideas I had in mind when I began working on my tool. The article is worth reading in conjunction with my tool. Though it generates similar outcomes to my tool, the NYT tool, like many other similar tools online only gives a single answer: Buy or Don’t. My tool allows the user to see the underlying number generating that answer (e.g. Given the details entered, a renter would be better off than a home owner by $25,000 over the period in question).