The following is a guest post from Accidental FIRE. He is an outdoor adventurer and teacher who lived a mostly frugal life only to find out “accidentally” that he was financially independent before he knew it was a thing. He practices and preaches the principle of stoicism and believes many can achieve financial independence by doing the same. He writes all about it at Accidental FIRE.
Rent vs. Buy
It’s a tough decision for everyone, especially when moving to a new area. To rent or buy?
Along with anything related to cars, this topic is one that gets people fired up a lot. The personal finance blogosphere is full of passionately written posts arguing for the benefits of either side, along with compromises like house-hacking and AirBnB side hustles.
I’m not here to argue whether your house is an investment or not. I own a house and I enjoy it very much, but your personal results may vary. I don’t consider my house an investment; rather a place to live and to have a home-base.
Living Arrangements and Transportation
For most people the two biggest expenses are living arrangements and transportation. By maximizing your savings on those two expenses, you’re setting yourself up for financial success.
If you are currently contemplating a rent vs buy decision, SmartAsset has a cool calculator that might help you. (Affiliate Note – I am not associated with SmartAsset in any way and this is not an affiliate link. How’s that for a blogging curveball?)
When you first go to the site, it will walk you through 5 simple questions to get a basic gauge on whether you should buy or rent. The questions are focused around:
- Your Location
- What is your monthly rent
- What is the price of the home you are considering
- Your marital status
- What is your annual pre-tax income
(*Note – If you’ve visited the site before you might not get prompted with the questions since you already have cookies for the site in your browser. If you want to do the 5-step question process over again you can delete the SmartAsset cookies from your browser settings and refresh the site. Additionally, you could simply enter the data on the left side of the calculator.)
To show the results you get from the initial 5-step wizard that the calculator presents you with, I used median numbers for Washington D.C. I also used the 20001 zip code in DC, it’s not the wealthiest but not the poorest either.
- Zip Code – 20001
- The Median monthly rent for a one bedroom apartment in Washington DC is $2,000
- The median home price of homes for sale in Washington is $549,000 according to Zillow
- I chose single as my status
- The median income in Washington in 2016 was $75,506
Here’s the results I got:
Not a huge surprise here, the calculator says it’s better to rent for 13 years than buy for the “median” scenario in Washington D.C.
The Washington D.C. area has one of the most expensive housing markets in America. For folks with average salaries, it’s likely advantageous to rent versus jumping into home ownership that, on average, costs over a half million dollars.
One of the cool things about the way they designed the site is that you can easily adjust many of the values with a slider tool to instantly see how different numbers will affect the answer (the sliders are on the left side of the screen capture above).
Once you have your results, scroll down further on the page. You will see a detailed breakout of the costs. Most of the detail is on the ownership side since buying has so many different costs as compared to renting.
As you can see, they’ve really made an attempt to be comprehensive in their cost modeling. For home purchasing options, they allow you to enter possible HOA (Home Owner Association) fees, annual homeowners insurance, and the annual home value increase.
For renting options, they consider the annual rent increase and renter’s insurance.
There are also advanced fields for inflation and “rate of return on savings” which, comically, defaults to 4.00% (who’s getting that on savings these days!)
Pick By Geography
Better yet: they have a great interactive map that goes down to the county level. It’s super cool because you can adjust a slider that represents the number of years you plan to stay in that house, and the map dynamically changes the data of all 3,000 U.S. counties to show the data.
You know how I love maps.
Like all calculators, this program obtains base data from sources, and uses the information to make intelligent assumptions (see below).
Additionally, in the “About The Answer” section, you will find a pretty detailed explanation about how the cost of ownership and renting is calculated. I have to say: it appears they’ve covered their bases pretty well. It’s more thorough than many calculators that just grab a few pieces of ‘average’ data for a region, and make a glorified pivot chart.
Further down the page, they have a section entitled “How Long You Have to Live in America’s Biggest Cities for Buying to Make Sense”. The information covers major cities in America and gives an average time you’d have to live there for buying to make sense.
For instance, Washington D.C. and Boston are under a heading of “Old Money”. The claim is that the average length of ownership in Washington would need to be around 6.5 years for home ownership to outweigh renting on a return on your investment basis.
Money Isn’t Everything
The term “break-even horizon” refers to the time required for buying to beat renting. According to Zillow, the average time in America is right around 2 years. But individual markets across America are, of course, very different and have tons of variables.
This SmartAsset calculator can help you find the break-even horizon for a particular area, and has many tools to allow adjustment of the variables for flexibility.
That being said, the mostly non-economic variables of a location such as proximity to family, weather, and recreation opportunities are a large part of what makes us happy. These variables, of course, cannot be ignored, and can complicate a rent or buy decision. (See can you pursue fire and still live in a nice house)
Solid financial planning makes ample room for the non-financials that comprise happiness. So, use this calculator wisely.
Thank you, Accidental Fire, for this great post! Remember, not all of life decisions can or need to be made for economic reasons. The key is to find the plan that works for you and your goals. For some first time home buying tips, check out the Down Payment Movement.