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Rent vs Buy: back of envelope cost analysis
I read the post on Paul’s Tips: How to work out if you’re better off renting or buying a place to live and found a problem with this quick back on the envelope calculations.
What the cost of renting a house is compared to buying it
House number one
Price: $1,000,000
Rent: $31,285 per annum ($600 per week)
Current interest rate: 7%
Interest on $1,000,000 loan for one year: $70,000In this example, buying the house costs over double what renting it does for a single year. A lot of factors would have to change before buying could be considered more financially attractive.
This is incorrect as the comparison should be to the real impact of interest, which is total minus income tax deduction+property tax. My modified version would be:
If rent >= 60% of interest or 55% of total payment+1% of payment, it is better to buy on a pure cost basis as interest is tax deductible(25-33% off) if you do not hit the AMT limit.
For a 500K house, it has to be >= 2025 per month
For a 600K house, it has to be >= 2375 per month
For a 700K house, it has to be >= 2900 per month
For a 900K house, it has to be >= 3750 per month
For a 1.15M house, it has to be >= 5000 per month
The market should not be about to fall though and this does not cover property taxes, closing costs, insurance (House as well as Mortgage).
Now back to my usual topics.
Update: The deduction of interest rate from your federal income tax is a US law.
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There seems to be a disclaimer to cover your point. Since these things vary a lot depending on where you live, I think your point is moot really.
“Other factors such as maintenance costs and property taxes in your area have to be taken into account of course - but assuming those things don’t have too big an impact, in this case the person is much better off renting on a purely monetary basis.”
Comment by MonsterMan — July 19, 2006 @ 4:55 pmMonsterMan,
I believe the flexibility of your own home (Change lawn watering, update things as needed or leave) as a fair trade off for other expenses like maintenance costs, insurance, property taxes, insurance, your own appliances, etc.
Amit
Comment by Amit D. Chaudhary — July 24, 2006 @ 7:44 am