A couple days ago, I wrote about the philosophy that one could rent and become richer over time. In that piece, I used a very simple description comparing the two:
Let’s say, hypothetically, that you have a home that is eating $1,200 a month in payments, $500 a year in insurance, $1,000 a year in extra utilities, and $3,000 a year in taxes versus a rental situation that costs $800 a month to rent and $100 a year in insurance. The home will cost $767 more per month for the life of the mortgage, but the day that the mortgage is paid off, you own an asset worth $200,000 or so and suddenly have $433 a month more to invest than the renter.
Now, this scenario can bring on a lot of arguments about which is better, but it’s leaving out one factor: inflation. The cost of the insurance, the utilities, the taxes, and the rent will go up at the same rate as inflation, but the actual payments on the house will not. So, in the first year, it is correct that the home will cost $767 more a month than the apartment. Let’s keep going with this – given 4% interest, what will be the difference between the two at various points?
At the five year mark, the difference is $693.06 in favor of the renter.
At the ten year mark, the difference is $583.23 in favor of the renter.
At the fifteen year mark, the difference is $449.61 in favor of the renter.
At the twenty year mark, the difference is $287.03 in favor of the renter.
At the twenty five year mark, the difference is $89.23 in favor of the renter.
At the thirty year mark, the last year of mortgage, the difference is $151.42 in favor of the homeowner.
After the mortgage is done, in year thirty one the difference is $1,405.47 in favor of the homeowner, and in each subsequent year that gap grows by about 3%.
So, the only possible way for the renter to get ahead here is to really hit a grand slam with those investments in the early years. Each year that passes, the monthly advantage over the homeowner dwindles, and in some cases (like this one), the late years of the mortgage can actually see the homeowner paying less for housing, including their mortgage, than the renter. Obviously, when the house is paid off, the homeowner is way ahead.
So when is it preferrable to rent? If the monthly home payments are three times your rental payment or more, then you’re better off renting, but if they get closer than that, you’re likely much better off buying.