I ran an interesting analysis yesterday to help me feel better about how much I’m spending on a house! I wanted to see if I came out ahead or behind renting a 1 bedroom apartment vs purchasing a 1 br condo over the last ~5 years.
We moved into this 1 bedroom in April 2014. It was hard to find a comparable condo and exact data on its sale value at the time. I used Zillow estimates so the analysis isn’t perfect, but I think it’s close enough (if I’m doing it correctly) to be a fair comparison.
*I include “lost gains” because I am looking at total cost of ownership. At the end of ownership, this is how much one “lost” in value after owning or renting that property. While one “has to live somewhere” per a commenter, one doesn’t have to live in a rental that is any set price. The total cost of ownership should include lost gains. I also don’t include “home equity” for this same reason. “Home equity” is a misnomer because when you sell it is just cash. If you rented for less, that cash would also be in your pocket (and available to invest.)
Cost of Renting the 1br Apt (800 Sq ft)
-$183,333 – Rental Costs
-$112,871 – Lost Gains (S&P 500 w/ dividends reinvested)
====================
TCOO = -$296, 204
Cost of Owning 1br Condo (750 Sq ft nearby)
-$28,740 – HOA
-$55,424 – Tax & Insurance
-$54,556 – Interest
-$387,691 – Lost Gains (S&P 500 w/ dividends reinvested)
-$20,578 – Maint estimate
-$43,200 – Cost to Sell (realtor fees)
$178,000 – Tax Free Gain
$35,000 – Est Tax Savings
====================
TCOO = -$376,918
Renting was cheaper!
Does anyone see anything wrong with my calculations above?
I don’t think “lost gains” makes sense to include in this context. You have to live somewhere. So it’s not like you could have invested that money in the market.
Also, $6k per year for maintenance seems expensive for a condo that is already charging an HOA fee.
I’m not sure if I’m understanding this exercise.
Are you assuming that you sell the condo at the end of the comparison period, or that you still own the condo?
It’s hard to tell if there’s anything is wrong with the calculations when the assumptions for the inputs aren’t all spelled out (e.g., cost of condo when purchased, cost of condo when sold, market return, etc.)
The assumption is we’d sell (basically looking at comparing what actually happened — renting my 1br apartment for the last 5 years and now buying a home vs if we had bought a 1br condo and sold to buy a home.) I tried to find a comparable condo to our apartment (it was a little smaller but in the same area.) Market return was based on S&P actual performance in that period with dividends reinvested. The condo was around 530k (I forget the exact amount but it’s accounted for in the “gains” section) and went up to 720k.