Comments on: Rent vs. Buy

By: Gloria Cheung

Gloria Cheung — Thu, 18 Feb 2010 14:12:00 +0000

you guys are geeks ^_^but i'm really glad there are people like you in the world.

By: Amit Chibber

Amit Chibber — Thu, 18 Feb 2010 13:26:00 +0000

Yeah, a good spreadsheet is key for this analysis.

By: Phillip Cheung

Phillip Cheung — Thu, 18 Feb 2010 13:12:00 +0000

Sure, email me a copy.

By: Adarsh Carter

Adarsh Carter — Thu, 18 Feb 2010 13:03:00 +0000

I have a detailed spreadsheet I put together that does all of this, and more. Let me know if you want a copy.

By: Phillip Cheung

Phillip Cheung — Thu, 18 Feb 2010 11:52:00 +0000

The interest deduction is definitely something to consider, but it has to be considered along with the opportunity cost of not having the cash you used for the downpayment ($200,000 for that $800,000 mortgage in your example), as well as what your monthly cash flow looks like (you can alleviate this by adjusting your withholdings on your W-4).I'm interested, however, in coming up with a rule of thumb that would be useful.So let's see if we can make one up:For a 30 year fixed mortgage, 79% of your first payment is interest. You can deduct this interest from your taxable income, so you need to figure out what your combined federal and state income tax rate is in order to figure out what the actual tax savings are. So if your combined tax rate is 25%, that means you can count on getting 20% of your mortgage payment back. You can pay 25% more for a mortgage payment and net out at zero. If your tax rate is 35%, you can get 28% of your mortgage payment back. You can pay 38% more for a mortgage payment and net out at zero.Does that sound right?

By: Amit Chibber

Amit Chibber — Thu, 18 Feb 2010 11:24:00 +0000

Indeed, an $800,000 mortgage with a 30-year fixed rate of 6.5% will involve interest payments of $50,000 in the first year. Reducing one's taxable income by that amount can be quite a bonus — unless, of course, rent yields are really out of whack in a given region, or you're looking at the strong likelihood of near-term depreciation.

By: Amit Chibber

Amit Chibber — Thu, 18 Feb 2010 11:18:00 +0000

I agree with the analysis above. The only thing I would add, though, is that an analysis based on rent yields alone will fail to capture the tax advantages of buying a house, which can be substantial — especially if you pay AMT (the mortgage interest deduction is one of the few available to AMT-ers) or if your state+federal marginal tax rate is at 40 percent or more (by the way, escaping California's unreal income and sales taxes is one of the very nice side benefits that Adarsh has gotten by moving to a red state). I'm not saying I like this incentive structure — in fact, there is a strong case to be made that it's an unnecessary drain on the treasury — but there it is.

By: Adarsh Carter

Adarsh Carter — Thu, 18 Feb 2010 04:37:00 +0000

Those transaction costs can be quite substantial over the short term and when you take into account the market depreciation a property is likely to experience these days any old rules of thumb about "at least five years" go out the window. I looked at a place here and would have had to purchase at something like 75% of the asking price to feel comfortable.

By: Kay Lee

Kay Lee — Wed, 17 Feb 2010 08:43:00 +0000

Well, there's something to be said for ownership that kind of tips the scale one way making dollar for dollar a bad comparison. It's true though, if your mortgage payment is significantly more than the cost of renting a comparable property in the same neighborhood, you should reconsider purchasing a house.The general public ate up the low interest rate mimic, and purchased a lot of homes with a very high base cost. Building a house only costs like 50-100k. I think this argument can be extremely biased so it's hard to say what's more logically responsible: renting or purchasing.

By: Tomas

Tomas — Wed, 17 Feb 2010 06:20:21 +0000

Well put. Been thinking the same for a loooooooooong time!