Rent vs Own Calculator: should I rent or buy home?
Choosing to rent or buy your home is a major decision that affects not only your lifestyle but also your financial health. when it comes to owning a house is emotional to all of us. It could be very hard for your parents to achieve that dream when they were young and bought the house at their retirement by going through a lot of pain. Right now, many people lean towards ownership and considering that it will elevate their status and it leads to happiness. Also, there is peer pressure and social influence impact your idea of buying a house. This kind of FOMO makes you feel guilty if you didn’t own a house when everyone around us owns a house. However, it is important to analyze whether owning a house is better than renting or not. Consider the pros and cons of each to figure out that owning a house is best for your financial growth apart from the emotional bond. I could say read further if your decision to own a house than renting is based on a purely financial perspective.
The first thing that comes to our mind that the rent we pay for homes is money down the toilet. Nope, Home is one of the necessary expenses after your food and clothes. You are paying a house owner to stay for a certain period of time, considering that the renter will take care of any maintenance or fix during that time. You may be thinking that rent money can be invested in your own house rather than renting so you don't consider that you are not wasting your money by paying someone. Again it is not true unless you pay cash to buy a house. Most house owner paying their mortgage with miscellaneous expenses every month with some interest either up to 6% in the United States or up to 12% in India. We are going to find out how much will you save if you own a house then rent with the below calculator.
Disclaimer: I copied the below spreadsheet from Fatwallet Finance website. Please copy it to your drive before you modify it
There are few things that we need to fill out to find out the present value benefit of owning vs renting for 10 years. (Columns that are highlighted in yellow color). There are two sheets available for you to use: One for India and another one for the USA.
- Purchase price: The purchase price is the price a homeowner pays for his house, and the price becomes the homeowner's current value of a house for calculating gain or loss when selling the same house after N years. For example, the original cost of the home is 70 lakhs in rupee (Average cost of a house in India), or $250,000 (Average cost of a house in the USA) then it is the origination loan amount or appraised value of the house when you are buying.
2. Downpayment: A down payment is a type of payment, often in cash, made in the early stages of a purchase of a house. The payment represents a percentage of the full purchase price. It could be at least 5% or 20% to avoid private mortgage insurance. Here we calling it an Opportunity cost because this amount will be invested in stocks or Mutual funds if you are renting the house.
3. Interest rate: The interest rate is the amount you are charged for borrowing money — a percentage of the total amount of the loan. You will be paying more interest and less principal amount in the mortgage for the initial particular payment. Please refer amortization schedule.
4. Principal amortization (years): Principal Amortization is nothing but the duration of the loan. It can be 15 years or 30 years. A certain bank will make you pay for the whole loan terms unless you are ready to pay a prepayment fee.
5. Property tax rate: Property tax is a tax paid on property owned by an individual or other legal entity, such as a corporation. It is calculated by a local government where the property is located and paid by the owner of the property. The tax is usually based on the value of the owned property, including land. In the USA, it will be part of your monthly mortgage payment if you established an escrow account with the lender, otherwise, we should pay yearly once and it can be varied up to 6% to 15% based on which state you live. In India, I think it can be a one-time payment and it will not exceed more than 0.5%. Please do your due diligence.
6. Annual maintenance: Annual maintenance of the house is a surprise expense of the homeowner if you own an individual house or else it will be an addition to a monthly payment of the homeowner's association. Calculate the yearly expense of the house approximately. In the USA, many homeowners buy a home warranty to avoid big surprise expenses.
7. Housing association dues (annual): If you have added the Homeowner association fee as annual maintenance then keep this amount as zero.
8.Annual insurance: Homeowners' insurance is made up of coverages that may help pay to repair or replace your home and belongings if they are damaged by certain perils, such as fire or theft. It may also help cover costs if you accidentally damage another person’s property or if a visitor is injured at your home. It is very common and mandatory to buy home insurance in the USA but for India, we can keep this value at zero.
9. Assumed annual appreciation: Appreciation is an increase in a value of an asset over time. Considering a 3% increase of your asset annually is the national average appreciation value. I think that this value can be applicable to India as well. But in the USA, the local housing market trends, as well as the economy, makes for a great deal of fluctuation.
10. Assumed marginal income tax rate: In the USA, mortgage interest will reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. For India, please do your due diligence.
11. General inflation: Inflation is the rate at which the value of a currency is falling and consequently the general level of prices for goods and services is rising. In the USA, 10 years inflation rate is around 2% and In India, the inflation rate is quite high which is around 7%. This parameter plays an important role in any financial wealth management. Human tends to plan for short term and missing huge picture that inflation will lower your money unless you invested right, it can be real estate or securities for long term. Please educate yourselves and your kids with the right investment strategy.
12. Monthly mortgage payment: Don't bother. If you fill out the above parameter, it will calculate itself with a formula.
13. Cost of renting a similar home: This is simple, you might be renting now or looking for a big place to rent. Please do your research to find out renting amount if you are planning to own a bigger house because this value should be accurate or close to accurate to find out real savings over owning a house.
14. Assumed rental price inflation: Everything has inflation either consumer goods or services. Approximately 3% increase in your rent after 11 months lease as per agreement. So, use the same unless you have an exact price change in percentage.
15. Assumed annual (after-tax) return on cash: This parameter will make a huge impact on your savings while renting. Previously I mentioned the opportunity amount i.e downpayment which will be invested in stocks or mutual funds if you rent over owning a house and the difference of amount when you rent vs mortgage should also be invested in stocks or mutual funds. Assuming it will provide a 7-10% return every year. Enhance your investment knowledge and do your due diligence otherwise, this calculation will not work for you.
Below provided a sample calculation of buying a house in the USA vs India. Check out how your financial plan affects when you own a house vs rent with your values.
Based on the above calculation, 70 Lakhs house and 10 years mortgage payment gains you nothing other than you end paying 33 lakhs more.
If you invested $250,000 on your house over renting, then you are saving ~$45k in the USA.
In simple calculation, the Price to Rent ratio can be helpful to determine whether owning a house is a good decision or not.
The price of a house divided by the Annual Rent Amount should be less than or equal to 15.
For example, in the USA, the current value of the house is $300,000 / $21,600 (Annual Rent) = 13.889
In India, the current value of the house is 70,00,000 / 1,80,000 (Annual Rent) = 38.889
Now the decision is yours.
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For the Tamil audience. please check out this video : https://youtu.be/BAeD3B-oiYM. Above post is inspired from this youtube video.
