# Sophisticated Rent v. Buy Calculator



## Young&Ambitious (Aug 11, 2010)

I'd like to settle a "differing point of views" discussion between my boyfriend and I. He thinks renting is throwing away money whereas I think that, circumstances depending, one may get ahead further, financially speaking...

For example, if Rent is $1000 whereas a mortgage is $1500 (we'll pretend this is all inclusive for simplicity's sake). If John Doe decides to rent and invest the $500 difference monthly versus Jane Doe who buys - who is out ahead in the long term? 

I know returns are difficult to anticipate so we'll assume a 7% annual long term return on the investment, 3% total return on the property over X period. I know there's also qualitative factors which are difficult to quantify (eg. "cost" of security and peace of mind etc) but again for simplicity's sake let's ignore those. 

Can anyone recommend a calculator which can incorporate some of these *and* breakdown the interest vs. principal mortgage components? 

Thanks


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## Abha (Jun 26, 2011)

You could hammer this out in Excel in a few minutes if you know how to use the program.


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## MoneyGal (Apr 24, 2009)

http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca01821.html

Please take a look at the assumptions. Most rent vs. buy calculators that I've looked at are overly simplistic.


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## Young&Ambitious (Aug 11, 2010)

Yes, a nice NPV calculation. 

I was hoping there was a web based one. This way he can be absolutely sure it's not biased 

I think I'm right and vice versa so he and I may make a fun bet of this =P


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## the-royal-mail (Dec 11, 2009)

Having done both, I know that I save a boatload of money when I rent and spend a boatload of money when I own.

Next time he says you are throwing your money away on rent, tell him he's throwing away his money on property taxes, repairs, land transfer taxes, water, municipal levies, garbage fees, snow removal fees, real estate fees, interest on mortgage and mortgage cancellation fees. The system makes these middlemen rich while the money you save instead goes into your bank account.

Slice and dice.


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## Berubeland (Sep 6, 2009)

There's an easy enough way to do this...

Get him to pick a townhouse or condo on the MLS that he would like to buy. Get him to pick one in a larger complex. The price and the taxes are listed on the MLS.

Then do a search for the same property for rent in the same complex. In most cases you can search on viewit.ca or even mls under rental. 

The utilities will be a wash as you mentioned. 

Then run the numbers. 

Because I rent properties for a living I can tell you that renting in this environment is a significant savings at least in Toronto. 

Earlier this year I rented a bungalow worth over $1,500,000 at Bayview and Sheppard. Rent collected in this duplex is $2950 plus utilities. 

For a 25 year mortgage for $1,500,000.00 at the rate of 4.29%, your Monthly payment is $8,127.88. This does not include taxes, maintenance or any other expenses. 

Pretty good deal if you ask me. Not to mention that that particular property was overpriced for the market and took months to rent. Just down the street you can rent a lovely townhouse with no downstairs tenants and granite countertops for $1800 per month.


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## Young&Ambitious (Aug 11, 2010)

Thanks for the calculator MoneyGal, that's fun to play around with, just what I was looking for! 

Royal Mail & Berubeland: Yes and the calculator seems to agree when putting in factors relative to the Vancouver housing market I happen to be in. 

But of course the big questionable factor in my assumptions is the rate of appreciation in the housing market... An investment portfolio won't be affected by a real estate bubble the way a property would, if it were to occur. But oh well, we shall see!!


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## MoneyGal (Apr 24, 2009)

ALL of your assumptions are "questionable." I like this calculator because you are forced to make them explicit - and you can see how dependent on assumptions the various outcomes are.


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## the-royal-mail (Dec 11, 2009)

Great numbers, berube!

I am saving a lot of money by renting. That's the key. I am well discliplined with my money and I don't waste it. All the savings have gone to my tiered savings plan, and those funds are now there to keep food on the table in case something should ever happen.

I realize that a purchase is a good idea in some scenarios, esp for couples with kids who need the bedrooms and space. I'm just opposed to the notion that renting _automatically_ means "throwing money away" or "paying someone else's mortgage". 

That is not accurate in all instances.


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## Addy (Mar 12, 2010)

This is an excellent thread. We own, but I am not opposed to renting in certain circumstances like TRM mentioned. For us it seems we are ahead buying, but I feel that is due to things like we have a large down payment, our mortgage rate is only 2.55%, plus we plan to rent a room or two our in our large home to help pay down our mortgage faster.

It's nice to see some numbers associated with both. I expected to find we were better off renting but I was pleasantly wrong thank goodness!


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## steve41 (Apr 18, 2009)

Young&Ambitious said:


> I'd like to settle a "differing point of views" discussion between my boyfriend and I. He thinks renting is throwing away money whereas I think that, circumstances depending, one may get ahead further, financially speaking...
> 
> For example, if Rent is $1000 whereas a mortgage is $1500 (we'll pretend this is all inclusive for simplicity's sake). If John Doe decides to rent and invest the $500 difference monthly versus Jane Doe who buys - who is out ahead in the long term?
> 
> ...


If you want to get anal, RRIFmetic will do the best job, IMHO. Tax is the issue which complicates these types of number crunching scenarios. Spreadsheeting doesn't really address the aftertax income metric. Remember, rent, loans and investments don't operate in a vaccuum. Unless you include all your financial entities, you will be prone to approximation errors.


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## HaroldCrump (Jun 10, 2009)

Berubeland said:


> Because I rent properties for a living I can tell you that renting in this environment is a significant savings at least in Toronto.
> 
> Earlier this year I rented a bungalow worth over $1,500,000 at Bayview and Sheppard. Rent collected in this duplex is $2950 plus utilities.
> 
> ...


So you are saying many of these rental properties are not cash flow positive?
The owners are losing money?
Why are they doing that instead of simply selling the properties given such a hot market?


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## Berubeland (Sep 6, 2009)

HaroldCrump said:


> So you are saying many of these rental properties are not cash flow positive?
> The owners are losing money?
> Why are they doing that instead of simply selling the properties given such a hot market?


Right I've been saying that for a long time. Almost every single owner I work for is losing money this also includes the large ones, the latest portfolio I took on had to have a cash injection of $50,000 last month alone. 

Many many of the old time landlords are selling, the 428 unit building I worked at a few years ago that was in the same hands for 30 years, sold this year.

The townhouses I managed in Oshawa - sold
The same owner strip mall at Yonge & 407 -sold
His building in Brampton - turned into condos and selling

Many of the owners that were in the business have sold too many to count. 

This is what I see in this market, people who earn their living renting properties are selling and other people are buying. I have no idea how they will make money at the prices they are paying. 

Just take a look at the MLS commercial property listings some time. There are a bunch of blanks there where property management expense, maintenance expense, vacancy expense and capital expenses used to go

Then a big fat lie saying that it's a 7% cap rate. Except for in Toronto those outlays add up to about 22%. So if you believe your real estate agent you'll lose about 15% per year, wonder what you're doing wrong. Trouble is that these expenses are real even if they are "soft" in that you don't have to pay them up front or monthly. But if you can show me a furnace that doesn't break down or a place with no vacancy or no rent defaults well I can make lots of money. It's the worst business plan ever devised. EVER. 

It's contingent on every single thing going right in your rental business for the next 20 years. Furthermore with 17,000 new condo units coming on board I don't see rents going crazy, they are actually quite soft right now. 

I love real estate, I think you can make lots of money in real estate if you're smart and frugal but not if you're buying at these prices and rents. It's not based on feeling but rather on calculations for profit that have been around since before my father was born.


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## Potato (Apr 3, 2009)

The calculator MoneyGal linked to is pretty good. I like to also have one that includes transaction costs so you can also see that the length of time you plan to spend somewhere can be a factor. Also the ones that have you enter separately maintenance, insurance, property tax, and utility costs are a bit more cumbersome to use, but also force you to estimate each of those (and not forget one!) vs just coming up with one number for "monthly costs". 

The NYT has a neat one.

Be sure to look at all the options under advanced settings in the top right. It's set up for Americans, so you should set your "marginal tax rate" to 0 (to remove the interest deductibility factor).

But there are lots that get the job done (and that are Canadian). It's important to examine your assumptions. Anticipated appreciation is an important one as you pointed out: it's hard to beat something with a high amount of leverage that goes up 10% per year; if you anticipate declines then it's hard to beat not getting caught in that trap and just renting.

I'd recommend looking at a range of assumptions to see what the various scenarios are, and also to find out where the break-even points may be. 

There are other ways of looking at the question, and I like playing around with spreadsheets to think about it.

One example is one time I was talking about how much cheaper it was to rent in Toronto, that you had to believe property appreciated ~4-5%/year just to break even. And someone said "oh, but at the end of 25 years you'll have paid off your landlord's mortgage, and still be renting. I'll at least have paid off my own mortgage!" So of course I said "care to do the math?"

And then after putting the numbers into my spreadsheet the answer was nope, I'm not paying my landlord's mortgage at all (if my landlord had to buy now).



HaroldCrump said:


> Why are they doing that instead of simply selling the properties given such a hot market?


In part also because it is a hot market. Who cares if you're bleeding cash every month if you're making it up with a giant leveraged bet on appreciation?


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## slacker (Mar 8, 2010)

I wonder how regular folk can afford to buy a home at these prices.


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## steve41 (Apr 18, 2009)

slacker said:


> I wonder how regular folk can afford to buy a home at these prices.


 Basement rental suites (mortgage helpers). Bank of Mom and Dad.


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## MoneyGal (Apr 24, 2009)

More on rent vs. buy from today's Canadian Business online: 

http://www.canadianbusiness.com/article/33638--rental-complex--page1

Quote from the article:

_It’s long been established that, over the long term and after adjusting for inflation, *housing produces almost no return on investment*. The calculus looks even bleaker for people who don’t hold on to their properties for long. And that’s most of us. In Vancouver, for example, a recent survey found that half of new condo buyers expected to live in their units less than six years. When commission and closing costs, maintenance, moving and other expenses are added up, the sum can easily eclipse any equity amassed in that short time—even in a city with a skyrocketing condo market. What’s more, in the first years of ownership, your mortgage payments are going primarily to paying interest on the loan. Renters and owners both “throw money away”; the former just toss it to landlords and the latter to bankers. Or as Rabidoux, who’s writing a book about our housing obsession, puts it, “the majority of new homeowners are still renters; they’ve just gone from renting space to renting money.”_

(bold added by me)


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## brad (May 22, 2009)

One of the things that bothers me about these comparisons is that most people insist that you need to an apples-to-apples comparison by comparing the price of renting, say, a 3-bedroom detached home versus owning a 3-bedroom detached home in the same neighbourhood. That certainly gives you a *fair* comparison but in my experience at least it's not necessarily a *realistic* comparison.

That's because when people buy, they generally "trade up" to a nicer and/or bigger/better place than they had when they were renting. I'm willing to bet (based on my experience and that of most of my friends) that people are generally more willing to compromise on location, condition, and size when renting than when they're buying.

I rented for most of my life; we bought our first house 4 years ago when I was 48. I rented a one-bedroom cottage once and I shared a 2-bedroom house once, but all of my other rentals were apartments in houses or duplexes. Renting a 3-bedroom apartment in a duplex is almost always going to be cheaper than renting a 3-bedroom detatched house.

To do a realistic comparison, I think the extent to which you're willing to compromise when renting should be factored into the equation. We compromised on a lot in our last rental -- bad location (industrial/commercial district near an autobody finishing shop and the train tracks with freight trains passing through all night), but we got a great deal: $550/month for a 3-bedroom apartment. We stayed there for 5 years and during that timesaved enough for a 20% downpayment on our house, which is a 3-bedroom detached house in a much nicer and quieter neighbourhood.


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## MoneyGal (Apr 24, 2009)

Substitution bias is an important factor. 

Usually, though, when you are building mathematical models, you want to make them *as simple as possible* (but no simpler). 

In this case, that assumes you could EITHER buy or rent an identical house (actually the calculator assumes your spending would be the same and does not take into account the type of housing at all). 

This is yet another case, though, of how real-world results may differ from mathematical models. Nonetheless, from a modelling point of view, using the same spending rate in both scenarios provides a counterexample which can then be further elaborated to take into account substitution bias and any other behavioural factors.


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## the-royal-mail (Dec 11, 2009)

brad makes a good point about comparisons. Everyone has a wish list of what they want in a dwelling. For me, the most important factor is neighborhood. The dwelling MUST be in a good neighborhood. I will not live in uncomfortable surroundings just to "save up". So I have my wishlist of things I look for. When I moved to GTA for instance, the rent in my previous place was about $700 all-inclusive. In the GTA, a comparable apt would have been double that amount and about 30 mins from work. A beautiful condo was 3x that amount and much of that went to RE agents, banks, fees and other middlemen. The decision to buy that condo over renting was based upon wanting to live 2KM from work (I walked) in a quality building. I would have loved to find an apt at the price and quality in my previous city. I've since moved to a much more sensible area/city and am renting again, paying half what I was paying in GTA, for twice as much space. The money saved is going to MY bottom line, not that of middlemen, taxes etc.


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## brad (May 22, 2009)

the-royal-mail said:


> I will not live in uncomfortable surroundings just to "save up".


I think most people are more willing to make compromises on a rental because rentals are generally considered short-term. I generally stayed in my rentals for 3-5 years. But a house is more of a commitment; I don't think I'd buy a house unless I knew I was planning to stay put for at least a decade or more, so I'm less willing to make compromises there.

I agree that this is hard/impossible to model, but it does point out (as MoneyGal says) that the models only provide part of the answer and you have to do some thinking yourself in order to reach a decision.


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## the-royal-mail (Dec 11, 2009)

Absolutely. But I read somewhere (maybe even in this thread) that the average ownership period for Vancouver condos was 6 years. Not flippers either. Even in a hot market, I don't see how the average person can make much in these sales, after all the middlemen are through with you. I prefer to rent (if I can find a suitable place to live in) and save my money that way. Home ownership in the short term for the average working stiff is a really tough gig.


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## DanFo (Apr 9, 2011)

All those various calculators always confirm that I was right to buy. I got lucky in my timing because the local market went out of control a year after I moved in and has been high ever since (small town out in the sticks). I think a big factor in the rent vs buy arguement is how long you expect to be in the area..generally the longer the time frame the better off you are to buy, but in Vancouver or Toronto it might not be so...Last year my property tax and interest on my mortgage combined only cost me 4800 or about 400/month. I didn't include the principle payments since I will ultimately get that money back if I sell and figure any appreciation on the house will cover the costs from buying/selling..Saying you'll make money by investing the difference between the mortgage/ rent is nice in theory but markets can tank and seem very unpredictable lately.... not to mention the discipline needed to actually put all that saved money into accounts instead of spending it.


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## brad (May 22, 2009)

DanFo said:


> Saying you'll make money by investing the difference between the mortgage/ rent is nice in theory but markets can tank and seem very unpredictable lately


And real estate markets can't tank too?


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## DanFo (Apr 9, 2011)

housing prices *are* going to decline....I don't consider my home an investment of any kind, It's just a place to live with the freedom to do what I want to do around it...however when I am done living here I will be able to sell it and get back a large portion of the money it cost me to live here, whereas if i was renting I wouldn't see a dime ever come back. 

People who have to worry about a housing crash have probably made a poor decision on their current lifestyle....I have the luxury of being outside of any real urban area of any size so the inflated market here isn't as bad as near or in the cities...which I can never see myself moving to.


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## steve41 (Apr 18, 2009)

Once again.... there is another concern paradigm: estate planning. When you die, your house passes to your kids tax free. If you rent, do you plan to match that passed-on estate with saved capital? Tax and its effect over time, has a major effect on these types of rent vs own decisions


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## Berubeland (Sep 6, 2009)

When I was looking for a house to buy I was more willing to make sacrifices. First of all the goals I was trying to accomplish were unusual ones. 

I was thoroughly sick of renting, the vacancy rate was less than 1% I had terrible landlords. The first place I rented as a student was full of cockroaches, but I literally couldn't find a place above ground at the same price that also didn't have cockroaches and believe me I looked. The landlord & tenant Board had no where near the liberal bias they have today. 

Then, my next place was an industrial unit and the landlord was renting out illegal residential space. At one point he changed my rent by scratching out the rent on my lease and writing a new rent beside it. Then I found out that my hat water tank was hooked up to the jeweler who ran an electroplating machine next door. Who knew how much hot water this machine required? Like $400 per month in hydro bills worth. 

Then one day I went to his office to argue with the son of a gun about rent and on his desk was my paint can. A special and specific kind of paint I had bought to cover tar stains on an eavestroph, with my tarry fingerprints on it. I knew it was mine because I had to go to about 10 stores to get it. 

I had several criteria for my house...

It had to be the same amount I was already paying in rent, it had to have a basement apartment, it had to be cheap enough to pay off in 5 years, it had to be double brick in case I wanted to build up if I wanted to. 

I wanted a decent chunk of land, none of these houses where you can spit at your neighbors house from your house. 

Even today I hate subdivision houses and the houses on tiny lots. Most of all I wanted to be free of my horrible landlord. I wanted my own space. That's all. 

If I did it over I could still do it today, Oshawa still has cheap crappy houses. It really doesn't matter to me very much where I live or if my house is fancy, this house had one cupboard when I moved in and now has a full kitchen I made myself. I wouldn't pay a premium for most things in a house because I already know how to do it myself.


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## KaeJS (Sep 28, 2010)

Wow.

This thread really opened up my mind to renting.

I have said before that I am not all that savvy on real estate.

I definitely learned a lot just now. Thanks everyone.


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