An up-to-date Buy or Rent Calculator

With the “Tax Cut and Jobs Act” heavily reducing the tax incentives for owning real estate, I was curious to see how the trade-offs between buying and renting have changed. Alas, I couldn’t find any up to date calculators — the NYTimes’ still used the old tax system.

So I decided to make my own and share it with the world.

Quick start

Access the calculator (represented as a Google spreadsheet) here. To change the numbers, you’ll need to copy it to your own Google Account as follows:

Select “File”

Then select “Make a copy..”

Give the doc whatever name you want -> saving a local copy

Once you save a local copy, you’ll be able to tweak the input parameters and see a customized comparison.

Overview

The calculator determines the equivalent monthly rent to a purchase price. Generally speaking, if you can rent a place for cheaper than that “equivalent”, you should rent, not buy. Learn more from this NYTimes article.

The main driver for renting rather than buying is that historical returns on investing in equities exceed returns on real-estate. Buyers take a large opportunity cost by diverting down and principal payments into the housing market. (but gain the advantage of leverage when using a mortgage).

Input

The first spreadsheet tab represents “Inputs”. The presets are for a high-earning married couple purchasing a $1.5M condo (hey, this was made to research the Bay Area!) with a fixed-rate mortgage. The key numbers to tweak for your own situation:

• Home price
• Future appreciation projections
• Your federal and state marginal tax rates
• HOA cost

This calculator’s defaults are optimized for a California resident (even factoring in Prop 13 property tax increase limits); if you don’t reside in CA, you’ll need to change the Property Tax Rates.

Output

The second spreadsheet tab tells the “Comparison (output)” between renting and buying. There’s two models used:
1. (my own preferred) Hold your purchased home forever — this looks at how you’ll be doing in 30 years if you are living in your purchased home vs. still renting.

2. (NYTimes’ model) Sell your home at an opportune time. Because paying down principal reduces leveraged appreciation, in some markets, an optimal investment strategy may be to sell your home and buy a new one in 5 to 10 years. (but you’ll incur closing costs and possibly capital gains taxes).

Results under both models are available in the top 11 rows, expressing break-even rent in monthly dollars and price/rent (P/R) ratio.

Rows 13 onward give a full schedule of the savings from buying if you sell after N years. (Negative numbers are in bookkeeping style (parentheses), e.g. (100) to represent -100).

Advanced Use

My goal with this calculator was to enable maximum control and provide maximum transparency. You can see every intermediate calculation that goes in and full yearly payment schedules (for both renting and owning). Advanced inputs all have documentation; please comment on the source doc if anything seems confusing or wrong.

Modeling non-financial trade-offs

One objection to the calculator modeling “buy vs. rent” as merely a financial trade-off is that some people place additional value on owning.

Cited (non-financial) benefits of owning include reduced chances of “eviction”, easier ability to modify home, voting rights in an HOA, and ownership pride. Cited downsides are additional time costs of maintenance and moving.

If you naturally favor one method of living, my recommendation is to think about how much you are willing to pay to gain the above ownership benefits (less costs). Then subtract that amount from the “break-even” rent to model losing the ownership benefit.

(e.g. if you value ownership at $500/month, your break-even rent drops by $500. [Thanks Ken below in the comments for correcting this section!])

Accuracy fine-print

While this calculator is more accurate than any web app I’ve seen, there are a number of technical limitations to be aware of:

• In high-cost of living areas, the results are heavily driven by appreciation projections. These are very hard to forecast — play around with the calculator to see the very significant effect seemingly small changes have.
• As warned on the spreadsheet, real estate deductions and capital gains can jump tax brackets, making a single “marginal tax rate” not easy to determine.
• The tax calculation assumes that exotic proposals like using donations to pay state income taxes don’t come to fruition.
• (very technical) Rates this calculator uses (investment and house appreciation and inflation) have high variance; the comparison results don’t take into account this variance, which does skew the ultimate comparison. However, the non-linear factors in the expecations should be small, resulting in minimal skew.