I wish I were a renter. According to various online rent-vs.-buy calculators, if I bought now, I could make big money in the next few years merely by changing to ownership status.
I like real estate. I think it's a good thing to own, and generally -- but not always -- I think property ownership is an attractive, long-term, low-risk investment option.
I also like financial sanity, so I cringe when a magical calculator says a pot of gold awaits in the years ahead if I buy now.
My concern about such calculators and formulas is not their programming or math. I have no doubt that the numbers are being properly crunched, given the acceptance of certain assumptions. My doubts concern the assumptions themselves, as well as humankind's historic inability to predict the future.
As an experiment, I went to three different search engines and looked for "rent vs. buy real estate." With
Google, I turned up 5,040 hits,
alltheweb yielded 5,806 references and
Lycos returned 5,901 locations.
Not all of these links have online calculators, but a bunch of them do. I located three online calculators at random and tried to find out if I would prosper with ownership, given a $1,200 rental today compared with the purchase of a $200,000 home with 10% down and a seven-year ownership period.
Did they show me the money? You bet.
One said I would save $58,901 by purchasing now, another showed that I would be ahead by $48,166 and a third predicted I could put $43,241 in my pocket.
The numbers differ not because one estimate is better or worse than the others, but because each calculator uses different factors and assumptions. Each calculator accurately and properly provided a snapshot of a given economic scenario, but are such estimates relevant for prospective homebuyers?
Revise the assumptions -- which most calculators will allow you to do -- and you can readily come up with a variety of results.
For instance, do we assume that future annual appreciation of a home will average 2% or 4%? I tried a calculator at
Portfolio Mortgage and found that over seven years I could save $33,809 by purchasing instead of renting if I figured 2% yearly home appreciation, but my benefit rose to $65,585 if I increased the annual appreciation estimate to 4%. Fair enough, but why would we choose one rate over another? Does anyone actually know how much, if at all, home values will go up? What if home values fall? (Think about stock prices -- has anyone ever been wrong projecting future values?)
Will rents rise 5% each year, or 1%? What if we finance with an adjustable-rate mortgage and not a fixed-rate loan? What if interest rates change between now and closing? Does it make a difference if we buy a condo or a single-family home?
We could make assumptions based on historic data, but then which numbers would we use? As stock brokers tell us, past performance does not guarantee future results.
Not only can assumptions differ, but so can the factors included in each set of calculations. For instance, is loan amortization taken into account? Over a seven-year period, amortization for a conventional $200,000 loan at 8% would amount to a little more than $15,000. What about the switch from standard deductions to bigger itemized deductions that many new homebuyers enjoy?
The issue with rent-vs.-buy analysis is that the very nature of the question may not reflect real-life realities and thus the answer may be off base. Unlike the math used to show the area of a square or monthly changes with an amortization statement, rent-vs.-buy formulas attempt to analyze future trends and events -- something the cynic in me says is tough to do.
To fully benefit consumers, I'd like to see any site with an online rent-vs.-buy calculator also have a suitable, visible warning label explaining that while online computations offer a certain academic value, real-world realities may differ. This is not unfair, nor does it devalue such worth as rent-vs.-buy estimates may represent.
To their credit, some sites already display warning labels, while others should. For me, an appropriate warning in suitably large type would look like this:
Caution: The numbers produced by this calculator reflect certain assumptions which over time may prove to be invalid. The results you obtain many not include all factors relevant to your particular circumstances. Different assumptions -- and different factors -- can and will produce different results. For details, please consult with real estate, mortgage and tax professionals.
And for those sites without sufficiently large or clear warning labels, I have an alternative: Just guarantee calculator results with a pledge to make up any savings shortfall not enjoyed by consumers.
Peter G. Miller is the author of
The Common-Sense Mortgage and hosts the consumer real estate site at