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Early Retirement Extreme Forums » Housing Questions

1. 

   teewonk
   

   Apprentice
   Joined: Jan '11
   Posts: 94

   I know we've beaten this topic to death, but I want to make sure I understand the math. Due to a homestead exemption, I have a fairly low property tax rate (0.5%). If I'm using the wrong formula, then I made a worse financial decision when I bought than I thought I had, and I want to know it so I can deal with it.

   Here is my derivation of rent/buy cost equivalence:
   At a safe withdrawal rate SWR, renting requires principal P = 12*rent/SWR.

   If purchasing a house of cost C out of P, part of P must cover the house, and part must cover annual expenses. If the annual expense ratio is E (typically property tax, maintenance, and insurance), then annual expenses are E*C, and E*C/SWR must be set aside to pay for expenses. This leaves P-E*C/SWR to buy the house. To come out ahead, the house must cost less than this amount.

   C < P-E*C/SWR
   C*(1+E/SWR) < 12*rent/SWR
   C < 12*rent/SWR/(1+E/SWR)
   C < 12*rent/(SWR+E)

   Double-checking this, if E were 0%, then you just have to spend less than P to buy the house and come out ahead. If E were the same as the SWR, then C must be less than P/2 in order to leave P/2 to pay expenses, which are E*C<E*P/2=SWR*P/2.

   Critiques, other perspectives, general advice, etc., are welcome. Many thanks for your help.

   Posted 1 year ago #
2. 

   George the original one
   

   Expert
   Joined: Jul '10
   Posts: 1,938

   The calculation assumes that you're getting the same square footage or quality whether renting or buying. In my experience, most of the time, buying provides a bigger/better home for the same P.

   Square footage is relatively easy to factor in as $/sq ft. Larger is usually cheaper in this regard since "every abode has a commode", so to speak.

   Quality is subjective, but I usually consider it to consist of sturdier materials, higher craftsmanship, and lower maintenance. Notice that I'm not including luxury appointments in this definition, so a home theatre room doesn't count as quality (though if it were well-made, then it could). I'm not sure how ou can factor quality into the equation...

   Posted 1 year ago #
3. 

   dot_com_vet
   

   Master
   Joined: Jan '11
   Posts: 376

   Most financial experts say it's a lifestyle choice only, financially it's a wash.

   I'd agree with that, but obviously it's a generalization and there's exceptions.

   Posted 1 year ago #
4. 

   DividendGuy
   

   Master
   Joined: Dec '10
   Posts: 414

   I've done the calculations, and renting always seems to come out ahead for me.

   There are pros/cons to both sides. I personally think that if you are free from general attachments (kids, pets, geography), renting small spaces near city cores is probably the best path to ERE as it allows you flexibility if you want to supplement your income.

   Buying will eventually boost your net worth and it's something you can pass along, if a legacy is important to you. Also, if you have a family, then the financials of it all generally don't matter. You need to provide housing for your wife and children.

   Posted 1 year ago #
5. 

   jzt83
   

   Journeyman
   Joined: Jun '11
   Posts: 145

   Check out this NYT Rent/Buy calculator.
   http://www.nytimes.com/interactive/business/buy-rent-calculator.html

   Posted 1 year ago #

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