Still Debating Buy Versus Rent? Run Your Own Numbers

A few years ago, I wrote up a spreadsheet for buying versus renting a home.

I got reminded of it a couple days ago with a nonsense article out of an alleged financial paper, so I went back and found that, yes, indeed, I did still have a copy.

I just uploaded it for those who might want to play with the numbers themselves.

BuyHomevsRent.xls

It's in Excel 97. I suppose I could convert it forward, but my current copy of Excel has no problems with it.

It compares cost of renting and investing the difference versus a home purchase. I wrote three different scenarios into the spreadsheet: Never refinance, refinance every five years but keep making payments with an eye towards having zero balance thirty years after you originally bought, and refinance every five years and make the minimum payment on the new thirty year loan.

The sheet "Front" should be where you start, in case one of the others comes up. You enter your own values for the numbers down the left side of the sheet.

Purchase Price and down payment should be self explanatory
value adjustment was a feature I put in to adjust to what other, equivalent properties might sell for
assumed appreciation of the property
interest rate of the first mortgage (TD=Trust Deed)

interest rate of the second mortgage: given the market at the time, I assumed anything over 80% of value (Lesser of Cost or Market, i.e. lower of appraisal or purchase price) would be on a second trust deed. These days, second mortgages over 90% CLTV are not available. If you're all one loan, simply enter the interest rate of that loan in both loan rate boxes.

property tax
yearly property tax increase

monthly cost of Homeowner's Association dues plus insurance (add in things like Mello-Roos payments here too),
Assumed rate of inflation
what it would cost to rent an equivalent property instead

the cost of refinances I wrote about earlier (I assumed a standard closing cost figure - no points, no rebate from yield spread)

your standard deduction on federal taxes based on your filing status. The year I wrote this, the standard deduction for married filing jointly was $10,100. For 2020 it will be 24,200. If your status is something else, you can look up your standard deduction any number of places. The point is, you get this much of a deduction anyway - it's not accurate giving benefits from the home ownership deduction until you have actually exceeded the deduction everyone gets.

Value of your other federal income tax deductions. Just as it's not accurate giving benefits until you exceed the standard deduction, it's not an accurate comparison to withhold other deductions over the standard amount that you'd get.

Your marginal federal income tax rate - what you paid on your final dollar of income for the year. The spreadsheet does lose accuracy if your marginal rate changes due to the deduction - or would change without it - but that's a small effect and trying to compensate would have been extremely speculative, especially given how much playing with where certain deductions and credits peter out on the income scale.

Finally, the assumed rate of return of an alternative investment into which you would put 100% of the difference between the monthly payments of buying versus renting (as well as the down payment money). Speaking as someone who still had financial planning clients at that point, that's a ridiculously generous assumption, but you might be one of the exceptions.

Caveat Emptor

Original article here