The Rent Versus Buy Dilemma

Are you losing sleep over rent versus buy indecision?

Here is a convenient tool to help you:

The Rent vs. Buy Calculator

Zillow, an online real estate database company, has developed a tool to calculate the number of years it will take before the cost of buying equals the cost of renting.  This calculation is referred to as the breakeven horizon.  If you stay in your home past the breakeven horizon, consider buying; if you move sooner, renting is probably the better option.

The tool has various assumptions built in such as growth and investment rates, mortgage interest rates, maintenance, property taxes, selling costs, insurance, tax rates, rental expenses and brokerage fees.  And of course, the answer may also depend on which areas of the city you are considering.  In those areas that are expected to appreciate rapidly, buying would be more favorable.  In areas that have already gained significant momentum, renting may be the way to go.

If you input your geographic location of choice, expected purchase price, down payment and your current rent, the tool will generate the breakeven time horizon.

For example, I input New York City, $1 million purchase price, 20% down payment and a rent of $3,500.  My break even time horizon is calculated as 5 years.  Therefore after 5 years, I am better off buying.

Cost: My total cost of homeownership (down payment, mortgage, taxes, etc.) for a $1 million home in New York City is predicted to be $577,653 after 5 years.  The total cost to rent (based on paying $3,500/month) would be $247,613.   Therefore renting leaves me with a savings of $330,040.

Gain: However, after 5 years, if I bought, my home will have $543,479 in equity which will be available to me when I sell.  If I rented and invested the down payment and the other money I may save, it will earn around $78,513 in 5 years (assuming a 6% rate of return).

It is therefore better to buy than rent if I plan to live in the home more than 5 years.

Keep in mind this is a tool and there are many other variables that come into play.

If you have any questions on this tool or any other real estate related concerns, please don’t hesitate to contact me.



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