Rent vs. Buy – a restrospective

by cjw_5110​

I see a lot of posts on this forum that ask the rent vs. buy question. There are plenty of calculators out there, some more elaborate than others, but the basic gist of it is that your break-even point is typically around the 5-7 years mark.

My wife and I bought our first home in December, 2015, so we’re approaching that five-year mark, and I wanted to take a look to see how we’re faring.

Before we bought, we were renting a home below market value, and we needed to get out of that situation for various personal reasons; although we were set on buying, I thought it would be interesting to look at what things *would have been* if we chose to rent instead.

We bought a 3br 2ba home in the suburbs of a major city; cost of living is moderate to high. Had we rented, we probably would have gone into a 1br apartment until we had our first child, when we’d go to a 2br place, and finally to a 3br place once we had our second kid. That’s too complicated, though, so let’s just make an apples to apples comparison – let’s assume that we would have rented a roughly equivalent home the whole time.

Without further ado, here is the analysis:

Actual Costs of Ownership

Type Cost Comments
Mortgage, down payment, closing costs $109,311.00 $266k mortgage on a $280k home, refinanced twice to get better terms
Maintenance $16,210.30 ~1.2% of purchase price, per year
Home Services $6,681.56 House cleaning, lawn service – things we wouldn’t have done if we were renting
Home Improvement $3,611.15 Minor improvements, like adding mulch
Capital Improvements $44,173.57 Major improvements, like adding central A/C
Appreciation -$62,000 Home value went from $280k to $360k; after 5% closing costs if we were to sell, we’re $62k better off
Opportunity cost of Up-front cash $12,523.72 S&P has increased by 48.6% since we closed with $26k-ish
Total $130,511.30 Total costs minus benefits

I just took a look at roughly comparable homes for rent in the area (there aren’t many), and they are going for ~$3,000/mo; when we bought, they were going for ~$2,500/mo, so let’s just split the difference and assume $2,750/mo for the 55 months since we bought, and we get $151,500. We already broke even! Yay!

I started looking to figure out *when* we broke even, but that is a big pain in the neck, so I won’t bother.

Some lessons learned in the past 4.5 years:

  1. Rent is the maximum you pay to put a safe roof over your head every month; mortgage is the minimum. We pay $1,491/mo in mortgage, but our total cost of housing (excluding things you’d need to pay for regardless, like electrical / cable) has averaged around $2,050/mo. Mortgage only makes up about 74% of my cost of housing.
  2. Ownership means a lot more irregular expenses. I may be paying less on average, but there are some months when I need to spend upwards of $5,000 on my home because of things that break down.
  3. Initial negotiation was critical. We got into a bidding war with another couple and initially agreed on $305k (initial asking price was $299k), but after inspection we negotiated that number down; after our appraisal came in low, at $280k, we refused to pay a penny over $280k. The sellers threatened to walk, but we held firm, and they eventually relented.
  4. Pure dollars and cents are important, but there is something to be said about security and pride of ownership. We own our home; we aren’t subject to the whims of a landlord, and we will only move out of our home on our terms (or if there is some disaster). If we want to do something, the only limitation we have is what our township allows, and we have the freedom to do things ourselves or contract it out, which has meant that I’ve been able to do some things I’d never have learned to do in a rental situation. I take pride, for example, in the ceiling fans, outlets, and light fixtures I installed before our first child was born; I take pride in the roof I replaced on our shed; I take pride in the fact that I fixed our boiler in March, when a sensor was dirty and malfunctioned as a result. You can’t really put a price on that.
  5. Although ownership was right for us, it very easily could’ve been wrong if we were not fully prepared for the financial commitments that come with owning a home. It wasn’t great to have to dump more than $10k into things nobody could see, all within two months of each other in 2016. That could’ve put us in a debt spiral if we were not ready for that type of eventuality.
  6. Appreciation is somewhat arbitrary. While our purchase price was probably lower than it needed to be, current value has been driven somewhat by luck.
    1. Our next-door neighbor intended to sell his home to family for $275k in 2016, but someone came in and offered him $340k, which he took. That person made some great improvements and moved out last year, selling for $397k.
    2. Part of our low appraisal was that homes in this neighborhood were just not turning over, so it was tough. In the 4.5 years since we bought, five out of the ten homes on our block have sold, all to people similar to us. The neighborhood has gone from aging and quiet to young and vibrant. There were zero kids on my block when we moved in; now, there are 13 kids under age-10.
    3. Homeowners have virtually all made appreciable improvements to their homes – one has added a second floor; two have put on additions; my nearest neighbors have all done significant tree and landscaping work, all of which improved curb apeal. Had much of this not happened, there is no way our home would be worth $360k, even with all of the improvements we made.

I hope this helps folks who are considering buying!

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.