I hesitate to post this, almost dread posting it for the battle that might ensue because of it, but I thought this was pretty cool. The New York times has this rent vs buy calculator that takes more things into consideration than what you normally see – such as opportunity costs.
I plugged in the info for one of our client’s investment properties and it shows buying is better than renting after only 2 years.
Now, I haven’t thoroughly investigated this, and I can’t vouch for the results or the methodology or any of that crap, I just thought it was cool and some of you might like to try it out. Enjoy!
A real estate blog run by realtors. How ironic. This post is completely useless. You should do more research into the Rent vs Buy calculator posted by the NY Times and the valuations they use. Typical, realtor speak. No educational background.
If you plug in the numbers in the current alberta real estate market place, it’s funny because there is never a good buy situation at all.
Numbers are great for buying if the home value grows by at least 4-5% every year for 20-30 years.
Nice post poncho, I like how you bash their educational background without posting anything of use yourself.
Please, enlighten everyone here with your rent versus buy equation.
Here is my equation rent vs. buy:
I am renting a 900 sq. ft. 2 bdr. condo at Oliver square downtown. I am paying right now 1095/month all utilities included and my lease is due Jan, 31 2009. Here is my payments for the first 5 year (assume 15% increase of rent per year which, I think, is higher than the reality considering present state of the market)
Year 1 – 1095×12=13,140
Year 2 – 1260×12=15,120
Year 3 – 1450×12=17,400
Year 4 – 1670×12=20,040
Year 5 – 1920×12=23,040
TOTAL: 88.740
This is everything I am going to pay for 5 years if I keep renting this condo.
Now here is what You pay if You buy a 300K house which won’t be too much of a house
300K, 0 down @5.75% over 25years=1,887/month
Year 5 mortgage amortization (source http://www.1728.com/mortpmts.htm)
Payment total: 113,239 Interest paid 82,056 Balance: 268,816
Property tax: 2,000 (assume it is not going to change, but you know it will go up )x 5years = 10,000
Power, gas, electricity/month (average) = 300 +5% increase a year = 19,900 total for 5 years.
Maintenance (you always have to fix something in a house) + insurance (average) 1000/year = Total 5000 for 5 years let assume no increase (there will be for sure)
So just to get even you have to sell this house after 5 year for
268,816 (balance)+82,056(interest paid)+10,000+19,900+5,000+15,000 (realtor commission) = 400,772 without making even a cent, and the house is 5 years older!
Now if you decide not to sell the house, which mean you do not make any money 0, you have spent for 5 years =
82,056 (interest)+10,000 (property tax)+19,900 (utilities)+5,000 (maint. + ins)=116,956
and I as a renter have spent 88,740, which mean I have saved 28,216 over 5 years, average 470/month.
Sara,
That’s a cool app, and I got a similar result to what I calculated myself about 6 months ago; so I think it’s really useful for the less mathematically inclined.
I was particularly irritated with one of Canada’s major banks (the one that tells us we’re richer than we think): they have a calculator in which there are ABSOLUTELY NO input conditions that will tell you renting is better – even if your enter a rent of $0, and an interest rate on a mortgage of 25%, it will STILL tell you that you should buy. It doesn’t assume you’ll invest the difference in what you save in monthly payments.
Buy or rent?
This is too easy. you want to buy but cannot afford the house? you’re possibly living or targeting the wrong place.
It is forecasted by TD that Ontario is entering a recession. that means that people there may lose their jobs. Houses may get cheaper there.
you have to be selective, have a plan. You can only afford what you earn…
$450000 home in Edmonton or…
$225000 home in Ontario?
Frank,
If everybody thinks your way, no body will ever buy a house.
You must be renting a apatment not Condo, as you didnt mentioned condo fees in the equation.
How can you compare a 1095 sq.ft apartment with House. In 300K you can buy 1200 sq.ft house wihout attached Garage.
Also, you can enjoy so many things in your house that you can’t enjoy in Condo I believe. Also if you compare in long term more than 5 years I bet purchasing is beneficial. Interest are higher in initial years but decreases after 7 to 8 years, if you see Loan Tables.
And you always need a place to live not for just 5 years. You can’t live on street after 5 years.
Further, just compare the real estate prices from last 7 to 8 years and now.
These are my thoughts.
you would have to be silly to buy a house in edm today. i knew it before that rent buy calculator was available, that just reinforces it, 400,000 for a house here, dream on, 140,000 at best, all that buy are doomed
NR,
I am 35 now and after 5 years I will be ready to retire away from Edmonton. But “smart” people will buy a house in Edmonton, be slave for 40 years and keep dreaming about freedom “65″. Good luck to you and them, I am out of here soon!!!
NR,
Most people renting condo’s don’t pay the condo fees. I don’t. I am $1400 all-in. Maybe I am paying the condo fees in a bundle, but that is my monthly expense. No maintenance. No surprise.
I met a Gentleman/Realtor last fall when I was moving here. He was trying to sell or rent his son’s place.
The son had moved back in with mom-n-dad and decided to rent out his new Townhouse because he couldn’t sell the place yet. ie … stop the bleeding.
So the guy told us the place was $1750/month + utils … we offered him $1400 on the spot and he accepted. However, we found a condo that was closer to our work and decided not to rent his son’s place.
In that situation, the kid was willing to live with parents, subsidize his mortgage on his investment property and wait this thing out.
The kid was 19 years old! At least he will get his fingers burnt early enough to learn not to gamble with Illiquid assets.
I bet there are a lot of people in Edmonton right now that wish they could just walk down to the bank and “cash-in” their Investment Property / Retirement Fund / Future BMW.
Give it some time. Lets all just enjoy our Summer and take some trips, spend some money and relax!! No need to worry about falling house prices, tightening credit and economic turmoil.
These are things that are out of our little hands.
Great summer everyone!
The bottom line is that it is difficult to compare apples to oranges.
Historically, in the short term, renting is *almost always* a better deal than buying and, historically, if you are in for the long term, buying is *usually* a better deal than renting. If renters are extremely dedicated to investing the difference, they can often come out ahead in the long term, but all of the stats show that most renters are not that disciplined (despite their best intentions).
However, all of these sorts of analyses assume that the only important factor is $$. But, there are a great number of “lifestyle” variables that are also (perhaps more?) important than whether or not it is a better *financial* investment.
For some people, flexibilty to move is very important, and so renting makes more sense.
For some people, stability to never have to move is very important, and so buying makes more sense, even if it costs a little more.
For some people not having to do any maintenance, repairs, etc. is important, and so renting makes more sense.
For some people having the ability to entirely tailor their house to their own tastes is important, and so buying makes more sense.
Some people like the option of owning land that they can pass on to their children. Others like the option of saving money that they can pass on.
I really wish people would stop coming on these blogs and presenting things as if it were black and white dollar issue. “Buyers are stupid”. “No, renters are stupid”. It isn’t as easy as plugging figures into a calculator or comparing mortgage payments to rent.
Plus, keep in mind that many people *can* afford the houses they buy. The anti-purchase crowd always seems to assume that everyone who buys is making an irresponsible decision that they can’t afford. It simply isn’t true.
Franks comparison, for example, assumes a $0 downpayment on the part of the buyer. But, there *are* plenty of buyers out there who can put 20%, 25%, 50% down.
He also states that he is only planning on staying for 5 years.
In those situations, *of course* it is better to rent than buy.
But take the example of a young family with kids who is moving to Edmonton with plans to stay for the rest of their lives (or at least for an awfully long time). They want a place where their kids can grow up in the same neighbourhood — stability, etc. They have enough for a good downpayment, etc. In this case, it likely makes sense for them to buy rather than rent.
Honestly — can’t people simply acknowledge that different needs require different solutions and that it is ridiculous to treat the rent vs buy as a colour by numbers mathematical equation?
And
excuse me, people who have saved $100,000-$200,000 are not uneducated people, these people understand money like myself, to buy in an over inflated market would be fool hardy, and as they say about fools, they are easily parted from there money
Give me a break, lorrie.
Down payments are not only “saved” on a monthly basis — plenty of folks have a down payment “saved” by selling their previous homes for a profit.
Again with the platitudes (“fools and money”, etc.). Is it so difficult to acknowledge that real estate isn’t a simple equation. It has non-financial aspects that are important.
i didnt say people who have made money from speculated gains, i said people who have saved money and understand the workings of money, being a speculator in any market be it oil, gold, housing is gambling, and most gamblers meet the same fate, if you understand money you will always live below your means and buy what you need not what you want, the wishy washy world of finance today will come back to haunt us all, the 800 sq ft condos selling for $300,000 today will be tommorrows forclosure, a thousand times over, and it will be left to all us non gambling people to pick up the pieces of the trainwreck that lies ahead
But that’s just it — not all home buyers are speculators who are looking for a quick flip profit.
Some genuinely want a stable home in a nice neighbourhood and recognize that a long time-line is necessary.
Frank’s examples, for example, are comparing renting vs buying on a 5 year timeline with $0 downpayment. It is a ridiculous comparison.
God@!#it… all teh calculator tells you is that if you are in it for the long haul – ie – 20 – 30 years – then buy the house, if you are in it for the short haul – ie 5 – 10 years rent. If you have two little brats running around and screaming their heads of and you are okey with renting, not having a backyard and want to move every 2 – 3 years…then rent!
As it stands there are good deals out there…and for the dip who mentioned that he belives that houses will be again in the 140,000$ range….well …ughh….with the salary avg at what it is in edmonton, if that happends – I will buy another place and rent it to you for a 1000$ a month…do we have a deal??
GREG
exactly, if you are here for 14 years or less, renting is your best option, if you are here for 15 years or more, buy
i believe houses will be in the $140,000 range sooner then you think
pricedoutinedmonton.blogspot.com
No, squidly77, $140,000 always will be a nice downpayment in Edmonton.
Wow Squid, $140,000.00 huh. Who is going to build it?, the $2/hr carpenter on the $10k lot? I hope you have a Delorean because you will need it to build your time machine to get back to 1999 so you can buy that $130k house! Funny that you think homes will be that cheap again, I was just at the auto show a couple of weeks ago and a new Duramax truck prices out at just over $70k. In your world that truck will be what?, $12k? Just imagine that, a truck that is half the price of a home! Oh, and how about gas?, Squid price of what? 25 cents a liter? Squid, either get off your meds or up the dosage cause what your doing now ain’t working.
“…I plugged in the info for one of our client’s investment properties and it shows buying is better than renting after only 2 years.”
Please show us what numbers you plugged in, I’d be really curious to see this.
And why would you choose a screenshot whose mortgage rate is entered as 0.0%? Your client must have found one heck of a deal, no wonder the screenshot supports buying in this case…
My bad, I took a close look and it’s probably 5 or 6%. Still interested in what numbers you plugged in though if you’re up to sharing that info.
Thanks.
Some people believe that home prices can never go down. They are wrong.
For the first time since the Great Depression, America is witnessing a property crash of unprecedented proportions.
In 2007, the average home price dropped by 10%. Some predict another 15% correction in 2008. What must be gut-wrenching for those living in the so-called bubble states — Florida, California, Nevada and Arizona — are the predicted 40% price drops.
A few months ago, I would never have believed 40% price drops were possible — maybe 10% or 15% — not 40%. But when credible economists continue to use these numbers you have to start listening.
Could Alberta see something comparable? Probably not, especially across the board, but then again, who really knows.
I think that many people are too lazy to try to understand what the sub-prime issue is and how did it happen and that this can not happen in Canada. Also, the same majority are just too lazy to try to understand the economic fundamentals in Alberta but rather cheer for the losers in the bubble blog. I would say, just suck it up and go back to Ontario to collect your EI cheques.
Mike,
While the situation in the US is different than here, it doesn’t mean that Edmonton isn’t due for a correction. Prices can be pushed up by other factors than irresponsible lending (ie. speculation). Edmonton has a median price to income ratio of 4.3 which isn’t extreme, but still high enough to deter price appreciation. There are jobs, they just don’t pay enough. I’m not expecting to see a housing crash, but slow or little appreciation is likely.
http://www.demographia.com/dhi-ix2005q3.pdf
Toronto real estate prices doubled between 1985 and 1989…. and then they decreased by 34% between 1989 and 1996.
Most of the decrease happened over just 3 years, followed by a flatter curve with a small increase in 1994.
Prices never came back down to 1985 levels, but it took until 1997 to see moderate increases again…..
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mdm, are you talking about nominal or inflation adjusted prices?
The following is the graph of the yearly average residential price in Edmonton from 1971 to 2007.
http://img239.imageshack.us/img239/1223/edmontonaveragepricezb8.gif
As you can see on the inflation adjusted basis it took 27 years from 1979 to 2006 and another bubble for the prices to reach and surpass the previous peak value.
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BAD, my Toronto stats came from a graph made available by the Canadian Real Estate Association. They specified “Price in real terms”. Unfortunately, I only have a hardcopy and can’t send you a link.
I don’t know where some of you people have been for the last 50 years, but I guess you havent noticed that owning real estate has typically been a great investment. Its very simple, some people like to give someone else $80,000 for rent and some people like to own a piece of property.
See, this is what I don’t understand. That $80 000 you pay in rent, you will never see again. But at least when you buy you have a chance of making it all, more or at least some of it back right? Doesn’t this add on many + points to buying?
I admit I’ve never bought and only in the past few days I have started informing myself of what buying all entails. Maybe you can enlighten me why my above argument does, or does not work.
Thanks.
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Kat,
When buying you have to consider the cost of a loan or the loss of capital gains if buying with cash. Assuming that you need a mortgage here is a sample amortization table
http://docs.google.com/Doc?id=dfs6d96q_3hqjjjcgv
from Mortgage-X
http://mortgage-x.com/calculators/amortization.htm
Notice that on 300k loan at 7% after 5 years you would have paid $113,382.66 in interest to the bank and that money is gone. Also notice that in 25 years the price of the property has to more than double just to break even on the mortgage carrying costs not to mention taxes, maintenance/renovations, upgrades and similar expenses.
It is important that you do your own calculation and financial planning before you venture into a property purchase. Also you should review your reasons for buying as typically the principal residence is not a very good monetary investment but a lifestyle expense.
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