# My Owning vs Renting Real Estate Math



## marshymell0 (Nov 29, 2013)

I hear a lot about this debate and tried to work out the math for a 10 year period, here is what I ended up with:

OWNING 240 000$ house 
Assuming a 200K mortgage and a 40K down payment with 25 years amortization I get roughly:

-40K downpayment = -40K
-900$/month mortgage x 12 x 10 years = -108K
-3000$/year property tax x 10 years = - 30K
-2500$/year maintenance x 10 years = -25K
-2500$/year utilities x 10 years = -25K
-600$/year insurance x 10 years = -6000

Total Expenses: -234 000$

Rent Income:
+900 rent (two rooms for 450$) x 10 months (not always full) x 10 years = + 90 000

Total = -144 000$

Selling House after 10 years:
- 1000$ lawyer fees = -1K
- 200K - 108K mortgage paid off = -92000 still owed

Assume no increase in value, sell for original +240 000$
- 3% real estate agent of sell price = -11 000$
-1% land transfer tax of sell price = -2400$

Final Return = -144 000 - 1000 - 92 000 - 11 000 - 2400 +240 000 = -10 400 

Another scenario: Let's say I sell for an annualized increase of 3% in house value in 10 years, so roughly $325 000 sell
- 3% real estate agent fee of sell price = -13 500
-1% land transfer tax of sell price = -3250

Final Return = -144 000 - 1000 - 92 000 -13 500 - 3250 + 325 000 = +$72 250

Now, a lot of people mention opportunity cost, so I took a look at renting and if I had invested those expenses and assumed I compounded roughly 3% annualized return on those expenses

-600$/month rent x 12 x 10 = -72 000

Assuming a roughly 3% annualized return if I had invested those expenses I used on the house after 10 years I get:
-40K downpayment --> +54 000
-900$/month mortgage, or 10 800$ for the year --> +14 500 
-3000$/year property tax --> +4000
-2500$/year maintenance --> +3300
-2500$/year utilities --> +3300
-600$/year insurance --> +8000
(I can't invest the selling house costs as that's not opportunity cost!)

Total: +87 100 - 72 000 = 15 100

New Conclusion:
So it looks like if your house can make a 3% annualized increase in value every year, it seems like it beats out a 3% annualized return on the opportunity cost. If the housing market stinks after 10 years and I sell at the same price I bought, I lose money.

Let me know what you guys think or if I missed something or you think a number should be changed!


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## Just a Guy (Mar 27, 2012)

Well, you forgot the realtor fees in selling your house. (7% on the 1st 100k, 3.5% on everything after that or about $12,000 in your example). 

Your utility rates also look very low for home ownership. They can be lower with rentals because some may be included in the rent, but for a home I'd love to get away with only $1600/year for water, gas, electricity...I think the fees the companies charge me just to have the service is nearly $1000/year before consumption). 

Maintenance is also usually calculated at 1%/year, so you are a little light there as well.

That being said, your property taxes may be a bit high, but that depends on where you are.

You also ignore the issue of the market going down (just ask people in Calgary). Also, the freedom you may not have...if you need to move, breaking a lease is easier than breaking a mortgage.


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## Ag Driver (Dec 13, 2012)

As previously stated your utilities should be closer to double your estimate. (Water, Hydro, Gas)

I would assume a more realistic vacancy rate for rentals. Read 50% vacancy. I am achieving a bit better than 50%, but I think I can safely expect one room to be rented at all times.

I think you property tax is good representation (for my area)

I would bump up your insurance to the $600 range, as you will need rental coverage for 2 room mates -- there are not too many insurance companies that will cover renters. I pay

Assuming you want internet (I do without TV), you can tack on another $550-$600 a year.


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## marina628 (Dec 14, 2010)

I have a home that would fit this criteria -utilities in a 1300 sq ft home for 2 people is actually $2600 a year plus whatever phone/cable difference would be. Also you need to allow for at least 1.5% yearly rental increases in this factor.you can google the last 10 years or more Ontario rental guidelines to get real numbers. My insurance for the rental is $860 for the year with full coverage.


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## kcowan (Jul 1, 2010)

I think you omitted the property transfer tax on purchase too. Are you buying the house without a lawyer? What about title search?


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## marshymell0 (Nov 29, 2013)

Thanks for the input! I've updated it, and now I am at a loss  if I were to sell at the same price in ten years

If I do have a 3% annualized increase in value though, I still come up ahead than if I were to invest that 3% opportunity cost.

Lawyer fee is included (1000$)...I did omit the title search..I am guessing that might be another 1000$?


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## Just a Guy (Mar 27, 2012)

Marina, you may want to shop around for insurance, my houses usually come in at the $500/year mark on rentals. Around $150 for condos. Watch that they don't ding you for unnecessary charges...I had one company cover me for $300k of contents and upgrades for example, which I dropped to the minimum coverage, or another time I was billed $1600 for one place to cover sewer backup...because all the policies were on one bill, and it was a sub charge, they thought they could just increase it (from about $50) and I wouldn't notice. It seems that company had been exposed to a lot of claims so had tried to get me to pay for their losses (I think I've only had one claim in all my years), they probably insured those places in Calgary or winnepeg. 

As for rental increases, if they are good tenants, I personally don't raise the rents every year.

Kcowan, he has $1000 for lawyer and fees, which is a little light, but reasonable if you shop around. I get mine around there, but I may get a bit of a discount because we use him a lot.


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## Just a Guy (Mar 27, 2012)

Marshymell0,

Homes are rarely an investment, despite what realtors (commissioned salesmen) will tell you. The profile of an investment property is completely different than a home. The problem with many "investors" is they don't realize that and thus don't tend to do well investing in real estate.

If you want to buy a place to live, buy a place to live. If you want to buy an investment property, first you need to learn what one is, then go out and buy one.

There is a big difference between the two.

Btw, if you sell at the same price, and account for inflation, then you are losing money too. Think of what your money could have bought you 10 years ago...especially in real estate.


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## none (Jan 15, 2013)

Just a Guy said:


> Marshymell0,
> Btw, if you sell at the same price, and account for inflation, then you are losing money too. Think of what your money could have bought you 10 years ago...especially in real estate.


This is true, however, if you're comparing investing versus house ownership both are victims to inflation so it's a bit of a wash.

Of course, if the bank is loaning you money CHEAPER than inflation then you're actually making out ahead.


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## dougboswell (Oct 25, 2010)

You did not mention what province you live in. In Ont the realtor commission for selling is 3.5-5%. However you cannot assume this will true in 10 years. Also in Ont the seller does not pay a land transfer tax only the buyer. As you are predicting that you will still have a mortgage there will be fees attached to this as your lender will charge a fee to draw up the papers and then a transfer and discharge fee. In Ontario electrical rates are skyrocketing so that is another one you can assume will be a constant over 10 years. 
You mention renting 2 rooms out. Are you going to declare that as income for tax purposes. You could write off a % of your monthly costs against the income. Then you would be subject to capital gains taxation when you sold.


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## Charlie (May 20, 2011)

If OP is living in the home too, you have to account for that. I would think a $240K home, owned for 10 yrs with up to $900/mo rental recovery would make sense unless there was a steep drop in price.

my back of the envelope math:

Cost (incl interest and opportunity costs) -- $240K @ 3.5% -- $8400
Ptax $3000
utilities $2500
mtc $2500
ins $600

Annual cost $17000
monthly cost $1416
recovery $600 (adjust for vacancy, tax etc)

net monthly cost $816

Could you rent an equivalent place for $816 including utilities?

Adding selling/buying costs of $15K over 10yrs would increase the monthly cost by $125.

Math works if you want the place. Now factor in the non cash concerns/ risk of wanting to sell before 10yrs and market risks.


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## Cal (Jun 17, 2009)

I would argue that a 3% investment return is a little on the light side. 5% growth and dividend return is a relatively safe number. Anything less, I would not be happy with the return at all.


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## Just a Guy (Mar 27, 2012)

none said:


> This is true, however, if you're comparing investing versus house ownership both are victims to inflation so it's a bit of a wash.
> 
> Of course, if the bank is loaning you money CHEAPER than inflation then you're actually making out ahead.


I was just pointing out a number they missed in their calculations.

Also, it would depend on the type of investment for example, you pay for your house with your after tax dollars...you pay for a rental house with other people's money, pretax, but he wasn't talking about real estate investing.


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## Sixth_Circle (Nov 22, 2010)

Is it just me or did OP also not factor in the interest paid on the mortgage over the 10 years? Also, as the $40K down is not quite 20%, they would also be on the hook for approx $3,500 in CMHC insurance.

Using a quick online mortgage schedule, the balance owing after 10 years under this scenario (assuming interest rate stays the same -- not likely) would be around $160K, not $92K.

(I find most homeowners never factor in how much they have paid in interest. They always calculate as if their mortgage payment was 100% against the principal.)


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## none (Jan 15, 2013)

Relevant: http://www.theglobeandmail.com/glob...ur-house-you-sure-about-that/article22410703/


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## Charlie (May 20, 2011)

none said:


> Relevant:


I don't get the zeal to deny that real estate has been a good investment. Which doesn't mean it still is.

In the vid....he grinds the gain to $79K from $300K. Which, if you consider the down payment was $15K is a still a pretty good after tax return.

But he neglects equivalent rent. If equivalent rent was $1500/m it would offset the interest and op costs he calculates at $177K over 10 yrs. So he's back to about a $260K gain (the calculated gain less buying and selling costs), which is pretty darned good. Again -- on a $15K investment.

I'm completely with those who calculate that real estate is a tough investment today. (or even a foolish one in the high priced areas). But the examples that attempt to manipulate the calculation of past gains to assert that real estate is rarely as good as it seemed are a pet peeve of mine.


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## none (Jan 15, 2013)

Yes I commented on the twitter post that he also ignored opportunity cost of invested money instead. Not the perfect analysis.

Basically if the market goes up at a higher rate then your mortgage interest rate you'll do great. Hard to beat making money on borrowed money.


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## kcowan (Jul 1, 2010)

Just a Guy said:


> Kcowan, he has $1000 for lawyer and fees, which is a little light, but reasonable if you shop around. I get mine around there, but I may get a bit of a discount because we use him a lot.


He has no legal fees on purchase. No title search. No title insurance. No land transfer tax. These omissions could become very expensive.


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## Just a Guy (Mar 27, 2012)

Depends on the area, my lawyer charges me about $400 for his actual fees and about $700 for the paperwork which includes a title search (which is cheap if you are a lawyer or realtor who needs to do it often they have a subscription), title insurance (also only a couple hundred, and still not common in canada and questionable if you're getting a mortgage), filing fees, etc.

Land transfer tax also isn't charged in at least half the provinces, and I don't think he said where he was located.


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## j8chan (Apr 5, 2009)

Found this article from 2012, more importantly it links to a google spreadsheet that is very adjustable and appears to account for all variables.
http://business.financialpost.com/2012/09/14/why-its-better-to-rent-than-buy/

google spread sheet. 
https://docs.google.com/spreadsheet/ccc?key=0AktN0CUf4uaVdHNvWFFzT0VPVFZTdi1ra0dCUC1jU3c&pli=1#gid=0


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