Yesterday’s prose was very simplistic and did not take into account many of the variables involved in the home buying process. Some of them play a big part in the equation and account for large swings in dollar amounts.
Below is the math which should include all of the variables involved. My thinking may not be perfect so please comment and let me know what thoughts you have.
I think in the end it is very clear which investment is the better one financially. But many people like to own their own home. Can’t do that if you rent your whole life. And many people would not save the difference between rent and buying so in a way it is a forced savings plan. And if buying a home can force people to save nearly $1M dollars, then they are likely much better off than if they rented (b/c they wouldn’t have saved that $1M). If you are disciplined and can save, I think you can do better with your money than the forced saving plan of buying a home.
Assumptions:
Assume $300,000 home for both renter and buyer
Assume 20% downpayment
Assume 6.1% interest rate on mortgage
Assume P/E of house is 19; annual rent costs $300,000 / 19 = $15,789/yr (not adjusting upwards as home value increase)
Assume 2% incidentals/yr (not adjusting these upwards as home value increases)
Assume 10% increase to mortgage bill will cover insurance + taxes
Assume 25% tax bracket for tax break on mortgage.
Assume both buyer and renter have equal money to spend on either home or stocks (ie – renter will have $60,000 to invest at day 1, while buyer will have $60,000 for his 20% downpayment)
Assume transaction costs of 1% at beginning and 6% at end for buyer and $20 on both ends for renter.
Buyer:
Yr 0 costs
– $60,000 – 20% downpayment
– $3,000 transaction cost (1% of home value)
Yr 1 – Yr 30
– $17,453/yr mortgage
– $1,745/yr taxes + insurance
– $6,000/yr incidentals
–Total = $25,198/yr ($755,940 over 30 yrs)
– $300,000 home will grow to be worth ($300,000 * 1.03^30) $728,178
Yr 30
– $43,691 – transaction costs (6% of home value)
Special Interest area:
Renter will pay $283,579 in interest over the life of loan. 25% of this will be tax free and will reduce the cost of ownership by $70,895.
In total, Buyer will spend $60,000 (downpayment), $755,940 (mortgage + taxes + insurance), $46,691 (transaction costs) less $70,895 (tax benefit). That means the buyer will spend a total of $791,836 for an asset worth $728,178.
Renter:
Yr 0
$60,000 to invest
– this $60,000 will grow to $1,046,964 after 30 yrs appreciation
$20 – transaction cost
Yr 1 – Yr 30 costs
$15,789/yr rents
–$9409 to invest ($25,198 home buyer expenses – $15,789 renter expenses; renter can invest the difference since we assume they have equal to spend)
these $9409 investments will grow to $1,547,724
after 30 yrs using FV(Annuity) equation
Yr 30
$20 – transaction cost
In total, Renter will spend ($15,789 * 30 yrs) $473,670 and have assets worth ($1,046,964 downpayment + $1,547,724 difference between buying/renting) $2,594,688.
If we hold onto house for 40 yrs does it improve our position?
If the house is held onto for 10 more yrs it will be worth $978,611. A large proportion of rents would go away so the costs would be $7,745/yr (or $77,450 over 10 yrs). Transaction costs would increase from $43,691 to $58,716. So now buyer has asset worth $978,611 that he has paid $881,211 for.
If the renter continues to rent for 10 more yrs, he does not get a discount on his rent. He spends $157,890 more on rents for a grand total of $631,560 of rental expenses over the 40 yrs. But he has an asset worth $6,729,953.
Conclusion:
After 30 yrs 




Assets 
Expenditures 
Profit 
Renter 
$2,594,688 
$473,670 
$2,121,018 
Buyer 
$728,178 
$791,836 
$63,658 








After 40 yrs 




Assets 
Expenditures 
Profit 
Renter 
$6,729,953 
$631,560 
$6,098,393 
Buyer 
$978,611 
$881,211 
$97,400 
I just ran numbers specific to my home & area values and there are several glaring problems with Mr. Bennett’s figures. It’s impossible to find rentals for 1/19th the value of the home, at least in the realestate markets I am familiar with.
If it were possible to rent a home cheaper than purchasing, there would be no profit in renting, which doesn’t make sense. There are many homes in my neighborhood mortgaged and rented for about $200 more than the mortgage + escrow payments.
As was previously mentioned by Jim (12/2/08), rental rates would doubtless rise as properties increase in values over 30 years and that is not figured into Mr. Bennett’s analysis, either.
One other unrealistic figure is the $6000/yr home maintenance and incidentals figure. A more realistic figure for me is about 1/6th that (or $1000).
After crunching numbers for several scenarios I might face, my results proved that the homeowner would be ahead of the renter by about $500,000. I did find the exercise fascinating, however. Thanks for the food for thought!
I see a few big holes in your assumptions: a.)you assume constant rents. If the house is increasing in value (absent bubbletype conditions like the last few years where prices overshot rents) than rents would increase as well. b.)You neglect taxes on investment gains. Even if you mostly leave stocks invested, a lot of the gains comes from taxable dividends, and you will owe capital gains when you eventrually do sell. C.) You are really comparing apples to oranges since you are not going to be able to rent a house that has yearly ownership expenses if $25,000 for $15,000 (again, in a nonbubble market). If you want to live in a hovel, you can save a lot of money, whether you rent or buy. And as for those 8%/yr stock gains – how’s that workin’ out for ya?