Best Rent vs Buy Calculator?

[hiddenpower]

Weighing a few options between Condos/Townhomes and just renting, but as a first time home buyer it's a little overwhelming so I was curious if there's a helpful tool to make a decision. Do online tools take into consideration things like 200k tax free gains on resale after 5 years, etc? Anything that can help to make a smart decision would be great. Is a comparison considering between VT today vs a house etc?

[SmallSaver]

I'll be the first of probably 20 people saying the NY Times calculator.

[arcticpineapplecorp.]

Do online tools take into consideration things like 200k tax free gains on resale after 5 years, etc?

i'm not sure what this is. maybe you're thinking:

The $250,000/$500,000 home sale tax exclusion - If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets. Topic no. 409 covers general capital gain and loss information.

Qualifying for the exclusion:

In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

source: https://www.irs.gov/taxtopics/tc701

it depends on where you might live and how that area might appreciate in the future (regardless of the past). This in part depends upon what the zoning laws will be in the future (which are largely local). I.E., if your local zoning laws are restrictive and prevent future development, then because of supply and demand it's likely a house's value (really the land, since houses depreciate. If you don't think so ask how much money people spend maintaining their homes) will appreciate faster than on average across the country. Otherwise, typically house prices (in general) tend to appreciate at the rate of inflation plus maybe 1%-2%.

Comparatively, stocks have appreciated at about 6.6% real (that's after inflation). That being said, VT has underperformed VTI because international has done worse than U.S. That's not any statement about the future, only about the past. Still stocks even worldwide should outpace the growth of housing, unless you're in a very restrictive location as I've explained above. But in that case, it's going to cost you now to buy into that potential for greater growth from real estate later.

Said another way, if you want to own a home, do it as a consumption item, not as an investment. Because in the end after expenses (which nobody ever calculates because they like to operate under mental accounting a home is generally speaking not a great investment; you're lucky if you get back what you paid for the home (in inflation adjusted dollars). So don't buy a home thinking it's an investment. It's usually not.

[bombcar]

You need to know enough to roughly build your own in Excel, because then you'll realize that the answer swings wildly based on assumptions that are easy to change.

I think the real underlying question isn't financial, it's personal.

Are you going to live in the same house for 7+ years? If the answer is "No" or "I don't know" you probably want to lean toward renting.

[hiddenpower]

Do online tools take into consideration things like 200k tax free gains on resale after 5 years, etc?

i'm not sure what this is. maybe you're thinking:

The $250,000/$500,000 home sale tax exclusion - If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets. Topic no. 409 covers general capital gain and loss information.

Qualifying for the exclusion:

In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

source: https://www.irs.gov/taxtopics/tc701

it depends on where you might live and how that area might appreciate in the future (regardless of the past). This in part depends upon what the zoning laws will be in the future (which are largely local). I.E., if your local zoning laws are restrictive and prevent future development, then because of supply and demand it's likely a house's value (really the land, since houses depreciate. If you don't think so ask how much money people spend maintaining their homes) will appreciate faster than on average across the country. Otherwise, typically house prices (in general) tend to appreciate at the rate of inflation plus maybe 1%-2%.

Comparatively, stocks have appreciated at about 6.6% real (that's after inflation). That being said, VT has underperformed VTI because international has done worse than U.S. That's not any statement about the future, only about the past. Still stocks even worldwide should outpace the growth of housing, unless you're in a very restrictive location as I've explained above. But in that case, it's going to cost you now to buy into that potential for greater growth from real estate later.

Said another way, if you want to own a home, do it as a consumption item, not as an investment. Because in the end after expenses (which nobody ever calculates because they like to operate under mental accounting a home is generally speaking not a great investment; you're lucky if you get back what you paid for the home (in inflation adjusted dollars). So don't buy a home thinking it's an investment. It's usually not.

Drafted up a large reply and lost it ;_;

This is an insightful comment thank you.
The area I'm considering is ATL. Maybe near the beltline if you're familiar with it. It's been exploding over the last decade and ideal for socializing and walkability. Currently I'm a single guy so I'm contemplating a condo/townhouse in a central area vs an apartment. Although I'm open to the idea of buying out in the suburbs later on in life for more value per square footage.

With mortgage rates as they are, is a cash offer likely better if one were to buy today?
Is "valuation" a consideration in today's terms say with shiller and VT to the real estate market? I see that supply has been increasing which has been an indicator in the past for a tipping point.

[Jayhawker]

This one is my personal favorite. The web design looks old but has its charm too: https://michaelbluejay.com/house/rentvsbuy.html

[arcticpineapplecorp.]

With mortgage rates as they are, is a cash offer likely better if one were to buy today?
Is "valuation" a consideration in today's terms say with shiller and VT to the real estate market?

a cash offer is ALWAYS better for the seller because they don't have to worry about things going wrong at settlement, mortgage falling through, etc.

a cash offer is better for you because you don't have to pay the higher interest all else being equal. High interest rates have kept many on the sidelines because what might have been affordable for the same price house at a 4% interest rate is now unaffordable for the same price house at a 7% or 8% interest rate.

Well, high valuations can affect asset prices but I don't think for 30 years, maybe over the next decade. So if you're comparing how prices might rise over 30 years, you're still likely to come out ahead in real terms with stocks over real estate. Look at the 30 years that ended with the lost decade...you still earned 10.05% CAGR over those 30 years. Valuations were high in 1999, right? Which then led to low/no returns for the next 10 years (lost decade 2000-2009), but because returns were good the prior 20 years (1980-1999) the CAGR was still good over that 30 year period. Maybe 1980-1999 returns (16.05% CAGR) is unrealistic for some future 20 year period, but bad past returns usually pave the way for future good returns and good past returns pave the way for future worse returns.

[breakfastinbed]

I like the 5% rule (https://pwlcapital.com/rent-or-own-your ... er%20month) or at least the approach underlying it. There is no perfect calculator because the single most important aspect to this calculation is knowing the return of your investment portfolio over the next 15-30 years, and no one can predict that. The more bearish you are on future returns, the more favorable buying is.

On the other hand, the problem with rent vs buy calculators is that they are designed to compare equivalent living situations. So if you are living in a 1BR apartment and thinking of buying a 2500 sq ft house, nearly every calculator will tell you to continue to rent; that's because you are not adjusting for the increase in quality of living environment, which is not objectively measurable.

Buying a home to live in (meaning no on will be paying you rent) is generally not a "good financial" decision and is very unlikely to out-perform the market in terms of return on investment. Financially, you are likely better off renting a small apartment and investing your money.

Of course, you could respond that part of the value of home ownership is non-objective, and it may be overall better for your personal happiness to buy, and I'd agree with that.

[blortchplop]

Karsten Jeske over at Early Retirement Now makes a good point that imputed rent is one of the biggest financial benefits of home ownership. https://earlyretirementnow.com/2017/11/ ... nvestment/

Hopefully, whatever calculator you use accounts for that.

[tashnewbie]

I think deciding to buy a personal residence mostly comes down to whether you want that lifestyle versus renting. I think it's prudent to ensure buying isn't a bad financial decision - that you can at least see yourself living in the area for the indefinite future, can afford the house and have adequate reserves or an exit plan for potential lean times. But ultimately I don't think it's helpful, at least for most people in most circumstances, to frame homebuying as an investment decision. It's ultimately a lifestyle choice and you may end up paying a premium for it. I bought my first home last year and am happy to pay a reasonable premium to have my own space.