If you want to jump right in to the Rent versus Buy Calculator to test your own assumptions, please download the excel file here
[Mar. 2023 update: version 3.2 of the spreadsheet has been uploaded. Many thanks to Alexander K. and Keith H., kind readers of the site who pointed out the correct way to calculate the tax shield on US mortgage interest payments. The spreadsheet now reflects a comparison between the standard tax deduction and the itemized tax deduction in your scenario.]
It is often said that “buying is always better than renting” or that “renting is flushing money down the drain”.
The argument is as follows: When you rent, your rent payments help your landlord pay their mortgage, while making you none the richer. However, when you buy a home, your monthly payments go towards your own mortgage, which increases your net worth.
Seems simple, right? Not so fast.
There are several factors which make this decision more complicated to assess:
This is not to say that renting is always better than buying. All I’m saying is that in some situations, renting will be better from a financial standpoint, and in other situations, buying will be better.
To help you make this important financial decision, I’ve built a “Rent versus Buy Calculator”. This is a tool that takes in assumptions for the renting and buying scenarios, and then spits out answers and outputs (including your net worth over time, the total annual cost of each scenario, sensitivity and breakeven analyses, and more).
First things first, please download the rent versus buy calculator here (actually download the excel file as opposed to ‘opening in Google Sheets’).
If you are not an expert at excel, don’t worry! I’ve tried to layout the spreadsheet so that you only need to look at one ‘tab’, and that once you enter a few of your own assumptions, the rest will automatically update for you.
The rent versus buy calculator generates several charts / outputs based on your assumptions.
These outputs will help you to understand whether renting or buying is better over a specific time period, the total costs for you to either rent or buy your home, and how the answers change based on different assumptions.
Shows how your net worth changes over time in both the renting and buying scenario.
In this example, renting is better than buying at the start, however, buying becomes better after approximately 7.3 years.
To be honest, it’s not necessary to look at any of the other charts.
From this chart you can see whether it is better to rent or buy after a given number of years.
The following charts will give you more detail on both the renting and buying options, and walk you through some “what if?” scenarios.
Shows the total costs of either renting or buying your home, in a given year.
The costs are further broken down in the following charts 3 and 4.
Shows the costs to rent your home in a given year.
This is broken down by rent payment, utilities, insurance, and other expenses.
Shows the costs of owning your home in a given year.
This is broken down by mortgage payments (principal and interest), mortgage loan insurance, property tax, maintenance, utilities, insurance, condo fees, and other expenses.
Shows how the difference in net worth between the renting and buying scenario changes based on different assumptions.
In the current example, net worth in the renting scenario is higher by $4,222 relative to the buying scenario in year 5.
If you are able to buy your home for $225,000 instead of the current assumption of $250,000, the buying scenario would be better than the renting scenario by $1,253 in year 5.
Calculates breakeven points between the renting and buying scenarios by changing one assumption at a time.
In the current example, the scenarios breakeven in 7.3 years. If you’d like to breakeven in 5 years instead, the following would have to change:
Shows how your net worth increases in each year, in percentage terms.
Note that the year 1 return for the buying scenario tends to be negative given that the one-time costs of buying / selling a home are typically larger than the increase in housing prices plus the mortgage principal paid down over 1 year.
If you sell your home further down the road, the one-time transaction costs are spread over a longer time period.
Shows the average annual increase in your net worth over a given time period (i.e., a Compounded Annual Growth Rate, or CAGR).
In the current example, the renting scenario has an average annual increase in net worth of 9.6% over the first 5 years, while the buying scenario will only have an average annual increase of 8.9%.
Shows the breakdown of your net worth in the buying scenario into two parts: (i) home equity, and (ii) stocks / bonds.
The buying scenario is assumed to accumulate a portfolio of stocks / bonds once the annual costs for buying are lower than the costs to rent.
Try playing around with the model assumptions to make the cost of buying lower (smaller home purchase price, lower mortgage rate, etc.) or the cost of renting higher (higher rent payment, etc.), and you’ll see that the buying scenario begins to accumulate a portfolio of stocks / bonds.
Shows how much you owe on your mortgage at the end of any given year.
Once you’ve acquainted yourself with how the rent versus buy calculator works, and what answers it can give, you can trying playing around with different scenarios and assumptions to see whether renting or buying is a better financial decision for you.
A few things to keep in mind:
And that’s a wrap!
Thank you for taking the time to check out my rent versus buy calculator. I hope that this comes in handy for when you make the decision to either rent or buy your home.
Please let me know if you have any feedback on how to improve this rent versus buy calculator (either through the comments below or by email at themeasureofaplan@gmail.com). My goal is to make updates to this model as time goes on to make sure that it is as easy to use and is as accurate as possible.
—
Header image photo credit: Gary Smith
View Comments
This spreadsheet is exactly what I needed. Thanks so much for putting it together.
Hey, Thanks for the amazing calculator and really all of the work you have done putting this whole website together! Just a couple of questions.
1. I'm not really sure where to find an accurate number for the annual home value appreciation (nominal) for where I live (Victoria, BC). Or even how to calculate this if I can pull together something like the average annual price of a comparable dwelling. Let me know your thoughts :)
2. Is the model sensitive to situations where either through gifts or incentive programs you are able to access additional money to put towards a downpayment that you would not have access to through normal saving and investing.
Cheers!
Thanks for the great Rent vs Buy spreadsheet. It is very helpful and insightful.
Have you considered also creating a Buy vs Buy spreadsheet? I think it could be very helpful to enable an individual to compare the value of buying one home versus another home. It could also just as easily compare the value of one high financing home purchase approach versus another lower financing + investing approach for the same home purchase.
Thank you very much for putting this together!! How would things change in the case where one takes out money from stock savings to buy a property as all cash and then invests every month the amount that would have been the rent payment back into stocks? Could one use the workbook for that case?