Total cost of house ownership vs rent in US

[kalki]

Some wuick thoughts.

1) If you are comparing renting to buying, you should compare similar size houses. Comparing a SFH purchase to renting an apartment is not exactly apples to apples.

2) Why is there an opportunity cost on selling commision?

3) Furniture cost - If you assume you are going to rent a SFH, furniture delta would come down. You will probably clutter the house with more furniture because its your own, but the delta wont be this high.

4) Insurance costs look too high.

5) What about state tax deduction. Your property / county tax is also deductible on your federal.

[returning_indian]

Some wuick thoughts.

1) If you are comparing renting to buying, you should compare similar size houses. Comparing a SFH purchase to renting an apartment is not exactly apples to apples.

I looked in my neighborhood and a house worth nearly 200k is renting out for 1200-1500 pm.

[QUOTE]2) Why is there an opportunity cost on selling commision? I just thought that you have to pay for it in while buying as most sellers inflate their price to include that cost.
[QUOTE]3) Furniture cost - If you assume you are going to rent a SFH, furniture delta would come down. You will probably clutter the house with more furniture because its your own, but the delta wont be this high.Good point.

[QUOTE]4) Insurance costs look too high.How much are they on average for 200k house?

[QUOTE]5) What about state tax deduction. Your property / county tax is also deductible on your federal.Was trying to cut down on property taxes to compensate for savings on state deduction and county tax deduction.

[kalki]

Insurance should not cost more than $50 per month. Thats what I pay in the Bay Area where house prices are higher.

I looked in my neighborhood and a house worth nearly 200k is renting out for 1200-1500 pm.

I just thought that you have to pay for it in while buying as most sellers inflate their price to include that cost.
Good point.

How much are they on average for 200k house?

Was trying to cut down on property taxes to compensate for savings on state deduction and county tax deduction.

[direstraits88]

You need to consider the similar houses while comparing rent to buy.

The only variable between one city and another is the property tax.

Here's an accurate calculator. http://www.dinkytown.net/java/MortgageRentvsBuy.html

It will take you 5 years to break even assuming zero appreciation for a house @ 200k which rents for 1200 per month with 2% property tax with 20% down on a 30 year loan @ 5% with no closing cost.

If there's any drop in value for next 5 years, then you will not break even during the next 15 years.:-)

[returning_indian]

For comparison, I attached my spreadsheet reflecting my actual costs. This is for a CA (non-bay area) house in a good area.

First of all there are several points that I would make about how you calculate things.

(1) You are confusing "lifestyle expenses" with "house expenses". For example - you don't need furniture because you bought a house. You need furniture because you wanted to live a certain lifestyle! You could have been a renter and done the same thing and achieved the same lifestyle. So, in my humble opinion, considering things like furniture, security sytem are irrelevant as far as buy-vs-rent is concerned. If you have to have them, you must get them as a renter too.

People who generally buy for first time tend to spend a lot of money on their furniture purchase while people living on rent tend not to. We are not talking about 7000 sq ft house here. Normal 1500 sq ft house. Again point of this thread is not to put buying down and renting up, but to make ourselves (and more importantly myself) aware of the actual cost of house ownership. People can put in their own numbers and play around. But it is important to be aware of these expenses.
[QUOTE]
(2) As others pointed out, you must compare the rent for the same house that you are buying. Similarly the utilities are for the same house as well. One can easily cheat themselves by comparing these for a 2-bedroom apartment to a 7-bedroom house.You are right. There will not be extra utilities if you rent similar house. I first started this spreadsheet to find how much it will cost for me to own a new house vs my current apartment expenses. Then I added rent of same house and didn't take off utilities.

[QUOTE](3) Having a financial reserve is a very good idea - but it has nothing to do with owning a house. You are going to need that reserve even if you are a renter and happen to lose your job. The only thing that owning a house does to you is perhaps you need a bigger reserve since you can't move quickly. So it is a very personal calculation. I personally don't consider it as a part of rent vs. buy equation (for my financial case).Reserve emergency is not for job loss. It is for when you have a job and something goes wrong like AC went out, roof needs to be replaced etc etc.

[QUOTE](4) Opportunity cost is very subjective. I would take a guess that most people are not hotshot investors and they would keep their downpayment money in the US in a relatively safe security like a CD. These days they are unlikely to get more than 3% for that.
Again this was for my purpose. Any extra money that I have is sent to India and it is pretty easy to get 9% or more there.
[QUOTE](5) These days you need 20% downpayment and I actually have 4.25% 30-year fixed with minimal costs.10% still works but I agree this could really vary state wise. CA is epicenter of all frauds and mismanagement, hence it is bound to have 20% requirement. But where I live some people with good history can get away buying without even paying anything down. So I just took middle ground of 10% and this is what I have seen couple of people recently do. Again play around with numbers and see how it works for you.
[QUOTE](6) I would guess that most engineers fall into 25%-28% federal marginal tax bracket. If you live in a high tax state like CA, you may save another 9% on state taxes.Well you guys are getting nailed there. Seriously need to move out of CA.

[returning_indian]

1. If you are going to consider the opportunity costs and selling costs, then you have to be fair and consider the appreciation in house value (home appreciation is also an opportunity), and also the increase in rent over the 2-5 year period. Typically, my selling costs have only been a portion of my profits when I sell and the remaining is the net profit.

I know it can vary state wise. Higher cost houses tend to have lower % cut for selling. A house with 200k value will have little higher % selling cut. My friend when sold his house couple of yrs back had to pay 6% and he just increased the cost of house by that much. Hence the theory that whenever you buy a new house, you are paying for 6% selling costs. Some people may buy in foreclosure and get away withe excellent deals, but that is not the point.
Appreciation of house is considered at the end with final percentage. You need nearly 8-9% appreciation every year to break even when you own a house.
[QUOTE]2. Similarly, consider only the interest portion of the mortgage - the rest goes into the principal and it increases over the years. For example, my interest portion is only 40% of my total monthly mortgage. This is also a way of stating that you are paying yourself instead of paying a landlord. The interest I pay is lot lesser than if I were to rent a similar home. So all these costs factor in one way or the other if you are going to consider the opportunity cost of the investments.If you see amortization, first 7-10yrs are pretty much interest expenses. Splitting interest and principal was getting really complicated, as I had to then substract it from tax savings and other things.

[QUOTE]I understand that home appreciation may not matter much in most areas. Typically in California, over the past 20 years (save for the current economic malaise), housing has always appreciated well. And the same thing happened the past summer too - there was a considerable increase in the housing prices during that 3 month period. Some folks are speculating that the same will repeat in Bay Area this spring buying cycle. I have made handsome profits in the past - its like living free.That is the whole point of exercise. We should be aware the actual cost of owning a house vs rent to find out the amount of appreciation we need to be financially ahead.

[GutsyGibbon]

If you see amortization, first 7-10yrs are pretty much interest expenses. Splitting interest and principal was getting really complicated, as I had to then substract it from tax savings and other things.

Using a Amortization calculator to see the schedule, helps. For a $417K conforming loan @4.5 you will be paying $2112 out of which $549 goes towards principal on the first month. It only goes up from then on. With very little overpayment, I had 50% equity built up in 10 years. Not sure why you think you will be paying interest alone.
http://www.bankrate.com/calculators/mortgages/loan-calculator.aspx

Depending on your tax bracket add the tax savings on the interest, anyways you need to do some tax withholding calculations after a home purchase.

[moneyIsNot_funny]

If you see amortization, first 7-10yrs are pretty much interest expenses. Splitting interest and principal was getting really complicated, as I had to then substract it from tax savings and other things.

Not true. Especially, if you are taking a low interest loan thats prevalent currently. You can see the difference in 2-4 years time.. And then, there are folks I know, who have taken 15 year loan instead of the 30.

[moneyIsNot_funny]

By the way, what's the period you are considering for your calculation? 5 yrs? 7? !10?
And, are you considering the increase in rent over these years?

[returning_indian]

Not true. Especially, if you are taking a low interest loan thats prevalent currently. You can see the difference in 2-4 years time.. And then, there are folks I know, who have taken 15 year loan instead of the 30.

Seriously, 80-85% of your payment is for interest for first 7-10yrs.

By the way, what's the period you are considering for your calculation? 5 yrs? 7? !10?
And, are you considering the increase in rent over these years?

That is worth considering. I have a feeling that when your landlord's mortgage is fixed, you can negotiate to not increase the rent. I could be wrong, but I didn't take rent increase into account over period of 5-10yrs. I have lived in apartments for last 7yrs and have not noticed any significant price increase.