Rent vs. Buy Calculator

This rent vs. buy calculator compares the cost of renting for 30 years versus buying a home with a 30-year fixed rate mortgage. The model assumes 3% closing costs, that rent and home prices grow at the “Future Inflation” rate (below), and that what you save by renting grows by the nominal “Portfolio Growth” rate (below). Change the inputs and see how it impacts your rent vs. buy decision.

How the Buy vs. Rent Calculator Works

This calculator works by comparing the act of buying a home (and selling it 30 years later) versus taking that same amount of money (downpayment + closing costs) and investing it in a portfolio over 30 years.

To make this comparison fair, we must also adjust for any difference in the cost of owning a home vs. renting over time. To do this, we compare the monthly rent to the total monthly housing cost and ensure that we match cashflows across both. In other words, if the rent is less than the monthly house payment, than the renter gets to save month (and invest it), otherwise the renter has to pull money out of the portfolio to cover the theoretical shortfall.

So, if your starting total monthly housing cost was $4,000 and your starting monthly rent was only $2,000, then the model assumes that you would save that extra $2,000 and invest it in your portfolio. This monthly saving amount will change over time as your rent, property tax, maintenance, and insurance costs grow with the rate of inflation.

While there are more advanced calculators out there, such as this one from the NY Times, I find that many of them are too complicated and can overwhelm the user with too many inputs. My goal was to create a simple rent vs. buy calculator that was free to use.

You can find my other calculators here and if you have any questions/comments not answered in the FAQ below, feel free to email me at nick at ofdollarsanddata.com.

FAQ

• How can my Final Portfolio Value be negative?
  • When the cost of renting is greater than the cost of owning a home, then you must withdraw money from your portfolio to make up for this shortfall. If you do this for long enough, you can get a negative portfolio value at some point. Obviously, you can’t have negative money, so this negative value represents the extra money you would have to pay as a renter compared to a home owner over time. You can see this for yourself if you set the initial rent very high or the home price very low in the model.
• Where does the starting Portfolio Value (in Year 0) come from?
  • The starting portfolio value represents the amount of money you would have used to buy a home. This includes your closing costs and downpayment. So if you put 20% down, then your initial portfolio value would be 23% of the home price (20% down payment + 3% closing costs). If you put 30% down, it would be 33% of the home price, and so forth.
• How can my Portfolio Value decrease over time?
  • If the cost of renting in a given month is greater than the cost of owning, the renter will need to withdraw from their portfolio to make up the shortfall. If the monthly return in the portfolio is large enough, then the portfolio value can continue to grow while shortfalls are occurring. However, if the shortfall is too large, then the Portfolio Value will begin to decrease over time and may eventually go negative (see the first point above).
• What will “Future Inflation” or future “Portfolio Growth” be?
  • We cannot know future inflation or portfolio growth because the future is unknowable. However, we can make educated guesses based on history. I’d rather not bias you with my view on this matter, so I leave up to you to decide what a conservative inflation estimate and nominal portfolio return would be for you.
• Does this calculator take into account X (where X = deducting mortgage interest, future refinancing, etc.)?
  • Unfortunately, no. My goal when creating this calculator was not to control for every possible situation, but to act as a third-party check on your overall rent vs. buy decision. If renting and buying are similar in the calculator above, then deducting mortgage interest or a future refinance could push you over the edge to buy (or vice versa). The goal of the calculator is to be directionally right rather than precisely wrong.
• What if my closing costs are 2% (not 3% like the model assumes)?
  • Stop missing the forest for the trees. If a 1% difference in closing costs makes renting or buying the preferred choice, then the decision really isn’t a financial one. In this scenario you basically have a financial tie between renting and buying, so the non-financial factors should determine your decision. Once again, the purpose of this calculator isn’t to give you the exact answer down to the penny, but to see whether buying or renting are even in the same ballpark of each other. Be more relaxed with the assumptions will help you determine where to focus next.

I hope you found this calculator helpful. If you want to support me, share this calculator with others or buy my book, Just Keep Buying.

Disclosures

All investments involve some degree of risk, including loss of principal. There can be no assurances that any investment will be profitable or that you will achieve your investment goals. Your actual results will vary based upon your individual situation, when you invest, future market performance, and other factors. Past performance does not guarantee future results. Analyses in this report indicating investment performance are based on past performance. Your portfolio’s performance may vary significantly from, and potentially be lower than, the performance presented.

The returns are not reflective of any specific product, and do not include any fees or expenses that may be incurred by investing in specific products. The actual returns of a specific product may be more or less than the returns used in this report. In addition, depending on what investment or insurance product you purchase, you may incur front-end charges, annual expenses, advisory or performance fees. For certain products, you may incur surrender charges, income taxes and penalties if the product is sold before a pre-determined period. For variable life insurance and annuity products, you will incur mortality and expense fees. None of these expenses have been factored into the projections. If included, fees and other expenses would materially reduce the projections.