I read a lot about a house being a "good investment", but is that really true? A house is not really a true investment, since you live in it. Try living in a mutual fund, you could get really wet and cold. So I have compared the costs and benefits of renting and buying the same Townhouse in Lansdowne Virginia, a suburb outside Washington DC. The housing market here is fairly balanced, with most houses on the market for 30 to 60 days, few foreclosures, and many similar houses for rent. I was able to find almost the exact same townhouse for sale and rent within 50 yards of each other for a decent comparison and I used Zillow to get the asking price and asking rent.
The referenced spreadsheet here shows the details of my analysis. It assumes that you either buy or rent the townhouse for 25 years and then move out/sell it. You could make it more accurate by adding other factors like closing costs, HOA fees.. but I doubt it will dramatically change the outcome.
The cost of renting for 25 years in current dollars is -$780,000
The cost of buying and paying off the mortgage in 25 years is -$215,000, assuming income tax effects or -$315,000 if you ignore the effect of US income taxes.
So, I conclude:
- Your personal house is a lousy "investment" since you lose money. But it is not really an investment anyway since it is your home and you live in it.
- Buying a house today in Virginia is superior to renting as you spend over $500,000 less to house your family. Even if you ignore income taxes, you still save 45% over renting. This is true if you plan to stay more than 5 years in the house. So why are people still renting? My guess is that people are still in shock over the housing crash and do not see the advantages of buying.
- Google spreadsheets are OK and they are free but not as sophisticated as expensive Microsoft Excel. Let me know if you find any errors in the spreadsheet.
For another view, check out this New York Times Calculator.
Acknowledgements: JR of jrsays.com blog for mortgage spreadsheet
Great analysis. The only two things that I saw missing in the spreadsheet is the initial down payment and a possible premium insurance (~1.5%) that is paid while the loan is above 80% of the property value. There is also the home owners insurance but that is more or less comparable to a renters insurance anyway.
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