Rent or Buy Calculator
Updated: Jan 20
Among real estate-related calculators, one of the most difficult to accurately determine is the rent vs buy calculator, despite tremendous progress among calculators in this regard over the years. Below I'll go through a relatively typical example for Newport News using Nerdwallet's calculator on the subject. If you don't like Nerdwallet's, Realtor.com has one, as does the New York Times, although there's a subscription wall with New York Times you may encounter. The most important element of these calculators is to ensure that all details are accurate prior to making a determination based on the calculator. It's also important to keep in mind the wide variety of exceptions that can throw these calculators off that I mention on my rent or buy page. Generally speaking, the higher the amount of down payment/closing cost assistance you can freely receive while maintaining low interest rates, and the longer that you are going to own a property, the more that purchasing makes sense. If you don't get higher returns in investments than current mortgage interest rates, typically higher down payments will also reduce the time it would take to break even. If you buy a home, make no changes, and sell within a short time without rapid market appreciation during that time, you'll typically be taking a loss if you acquired the property at fair market value.
1. Determine the monthly price of rent vs the monthly price of a comparable purchase.
Ideally you want to accomplish this task by taking the median price of homes that fit your criteria for purchase and rent when you have a data set of at least 10 options for each (more is better). That said, sometimes the place that you might purchase or rent is with friends or some poorly advertised fantastic deal, so it's also possible to do it by individual properties, although it's very important that you try to compare apples to apples of similar quality/suitability properties of rent and purchase. Even if I generally recommend trying to get something "cheap" & lower quality more so when renting than buying, since renting is short term and can give you more time to build up a down payment if you do get something cheap but suitable, when making this comparison for calculation purposes, it is best to compare similar quality properties.
1. Example: Comparison of median rented price vs median sold price $268,870 v $1595 for 3 bed 2 bath with a garage in Newport News
For instance, here's a Newport News Search of 3 bed 2 bath properties with a garage that sold in the past 30 days vs the same search for properties that rented from the past 90 days. I went back further with rentals to increase the data set.
The median sold price is $268,870, while the median rented price is $1595
2. Determine your interest rate if not provided by your lender already
Lenders can vary substantially on interest rates, expenses like origination fees (which can be as little as 0% or as much as 1%), closing costs, etc. The loan type, down payment you're using & your situation (i.e. disabled veteran, great credit, closing cost assistance or down payment assistance from a lender, non-profit, or government program, etc.) can vary substantially as well. It's ideal to get actual lender costs from lenders who are able to do soft pulls rather than hard pulls in order for you to determine your costs here. If not doing that & just wanting something quick with lower accuracy, check the average mortgage rate here. As of yesterday, 1/19/23, there it's 6.15%:
Image courtesy https://www.freddiemac.com/pmms
3. Plug in home price, city, comparable rent price, interest rate, loan term, and your downpayment into the calculator if not wanting to get too granular.
From here, you can plug in each of these factors into the Nerdwallet calculator, and get a rough idea of how long you'd need to live in the property to break even based on Nerdwallet's projections. Here's an example:
Image courtesy: https://www.nerdwallet.com/mortgages/rent-vs-buy-calculator
4. More options for higher accuracy
There are a wide variety of additional options. I would generally recommend making the selling closing costs 8% instead of 6% to be on the safer side.
I'd also recommend knocking the home value appreciation factor down to 2% & the rent appreciation factor up to 4% as well as inflation to 4%. Of course I could be off on each of these factors over time as they're projections for the future rather than simply looking at the present rates, but that's my recommendation. These changes will extend the time it will take to break even in this case:
