Rent vs. Buy: One person's actual data
Recently, after doing my taxes and figuring out how much of a tax benefit I get for my mortgage, I thought to myself, "I wonder if owning a house really does pay out the way everyone says?" So I proceeded to tally up every expense and benefit owning a house had compared to if were to have rented a place at the same monthly payment. I've lived in my place for over 8 years. I figured it would be a great real life, raw hard core data example to share with people.
In a nutshell, after brainstorming everything I could possibly think of, it came out remarkably even. In other words, if I had rented a place for the same monthly payment I was making, I would have come up no worse for wear. In fact, I didn't even include any time costs, like mowing the lawn, weeding the yard, etc. Here's a breakdown of the costs I came up with:
The equity and appreciation that we hear so much about is offset by realtor and repair costs. What's this I keep hearing about "throwing your money away" when you're renting because you're not building equity? Well, too bad when you sell it you need a realtor. And when the roof needs fixing or the runoff water needs to be re-routed to the front because it's flooding the back, that comes out of your pocket too. Not that I have any personal experience of that.
Here are the assumptions I used to come up with the costs:
Years in house | 8 | |
Purchase Price | 170000 | |
Down payment investment | 2.00% | Assumed rate of return if you had invested the down payment |
Sold Price | 184086 | My own guess based off comps |
Appreciation % | 1.00% | Based off the sold price |
Down payment | 30000 | 20% of purchase price |
Here's a breakdown of all the costs that went into the graph, and some more detail:
HOA fee | -150 | per year | I live in a house, so this fee isn't too bad |
Closing costs | -3000 | one time | |
Insurance | -400 | per year | |
Maintenance/Utilties | -38 | per month | Garbage, water, and sewer |
Down payment opportunity cost | -600 | one time | Earnings if I had invested the down payment |
Tax benefit | 1050 | per year | After the standard deduction, and 25% tax braket |
Repairs | -9400 | one time | See chart below |
Realtor costs | -11045 | one time | 6% of sold cost |
Appreciation | 14085 | one time | Based off my own estimate of comps |
Equity built up | 150 | per month | Average over the 8 years |
And here are all my repair costs, in gory detail:
Siding and wall damage from storm (deductible only, insurance covered all) | $1,000 |
New roof (plus deductible minus insurance) | $3,000 |
Roof boots (3X) | $300 |
Reroute runoff and drainage | $1,100 |
Landscaping | $1,200 |
New carpeting | $2,000 |
New drywall from fixed leaks | $800 |
Total Repairs | $9,400 |
These repair costs are even before anything a home inspector might come up with when I sell the house. Plus I need to re-seed my yard, it's looking a little sickly. And the back fence needs painting. Again, I didn't count the money I paid my neighbor kid to mow my lawn, or the hundreds of dollars of mulch, or fertilizer, or the tree I had to cut down that died... I better stop and continue this analysis before I lose everyone.
So what happened to all the great benefits that my parents and everyone else told me owning a house had? I tried to figure out what went wrong. The answer, as you might expect, is the housing market. I had a 1% appreciation per year over 8 years. I did a little sensitivity analysis... if I had gotten a 3% appreciation per year, I would've been $30,000 ahead! Whoa. OK, so let's say it was -1% (where it was in a lot of markets I bet). And the answer is... -$25,000. I think that's what everyone calls "underwater."
So this whole idea of owning a house as an asset boils down to how well the housing market does. And it's a huge swing. This is what economists call leverage... you borrow money to invest in something. So owning a house is an investment. It's owning a very risky investment. Would you put down $30,000 and buy shares of any stock? How about borrowing $170,000 on that $30,000 and buying up that stock? So why would you do the same on a house?
Here's raw data. Buying a house is a very risky investment. All the equity built up and the tax benefits gets sucked up in realtor fees and repairs.
Yes, it's the American dream. I plan on selling this house, but I will probably buy another one in the future. It's great to own your home so you aren't at the mercy of a landlord or a lease. But go into it knowing it's very risky, and be able to mitigate that risk by having a LOT of money in reserve. Buy a house because you want to live in a house, not because it's an investment. And make sure you can truly afford everything that comes along with it (see above).
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