Rent vs. buy case study

Posted on Jan 12, 2017 | New Home Loans

Hey guys! I just created this exact analysis for a couple of clients of mine in California and we called it the Rent vs. buy case study. I took their names off, obviously. But the numbers were staggering and I wanted to share it because I think it can impact so many of our clients that aren’t thinking long term. I think the decision to buy or rent comes down to the immediate payment on a month to month basis, but they fail to look from the longer term perspective of 5 to 10 years.

So in this case study what we did is we took the comparable rent, or what they thought they’d be moving into in terms of rent and we gave them three different financing options in the top left hand corner.

And the nuances of the financing options will sort themselves out, it’s really beside the point, you can click in the “More Info…” tab. Here’s what’s important. The bottom two sections allow you to analyze the amount of rent that someone is going to pay over the next 60 months in comparison to what they are going to pay down on their mortgage. I’d encourage you to click into the “More Info…” tab there.

In the bottom right had corner, it allows us to anticipate a 4% real estate appreciation rate, extremely conservative in California. It allows us to calculate what the mortgage balance is going to be 10 years down the road after they’ve paid off $100,000 plus in principal. And then subtract those tow numbers and tell us what our potential equity position is.

So, the decision that we’re making today is, do we want tax advantages and to put ourselves into a situation where we’re going to move a half a million dollars in equity in 10 years, or do we want to rent. And there’s a case for both. If someone thinks they’re going to be moving in the next couple of years, if there’s unexpected expenses in the future there may be a case for renting. But we should analyze this and we should think through the decision in a longer term perspective.

Now, one more thing before we leave, top left corner, what’s so cool about this is that there rent is going to go up from $3500 to a mortgage price of about $4200. But, they’re going to get $1000 per month tax break, they’re going to pay $900 per month in principal reduction. So in essence, they are taking money out of their checking account but they’re going to put about $2000 per month back into their savings account – “equity”. And if you look at the net payment, it’s actually substantially cheaper to buy vs. rent. Of course there’s going to be some maintenance and some fix-ups and you need to allot for that, but the analysis I think is powerful.

If this is something you’d like us to do for you or for your clients, we’d be honored to do it. Please call and talk to and we’ll get you set up. Or you can shout out to us on our page.