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Rent vs Buy

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Year
Year Renting Cost Difference Buying
Monthly Cost $ $
Total Cost $ $
Mortgage Type Options
SoFi: Mortgages As Unique As You Are
Disclosure View more mortgages
Cost Comparison Over Time
Cost of Renting $
Cost of Buying$
Break Even Year
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Cost of Renting Over years

Cost of Buying Over years

Rent Home Equity
Renter's Insurance Home Value
Mortgage Balance
Upfront Expenses
Down Payment
Mortgage Fees
Other Closing Costs
Ongoing Expenses
Mortgage Payment
Mortgage Insurance
Property Taxes
Homeowner's Insurance
Maintenance & Other Expenses
Selling Expenses
Closing Costs
Capital Gains Tax
Proceeds From Home Sale
Tax Savings
Lost Interest Income
Total Total

Our buy vs rent tool builds one model calculating all of the relevant costs of owning and a different model including all of the costs of renting. Next we figure out the tax consequences of buying a home (we calculate taxes at the federal, state and local level) and consider how home value appreciation and mortgage payments impact your equity in the property. Once the models have calculated all of the costs of owning and renting we compare the two in order to show you how long you need to stay in a property for buying to make more sense than renting.

How We Calculate the Costs of Ownership

First we start with the upfront expenses. Depending on where you want to move and the mortgage type, we estimate all of the relevant expenses required to close on a home purchase. This includes your down payment, local taxes, title insurance, mortgage fees and other expenses down to the appraiser's fee for assessing the value of your home.

We then look at the annual costs, which include your mortgage payment, real estate taxes, homeowner's insurance, maintenance expenses and, if relevant, mortgage insurance and HOA fees. It is important to note that our models use actual mortgage data from our partners, so the mortgage payments, amortization and any other related fees are all based on real mortgages that you could use to buy a property of the stated value.

Finally, we calculate how much money you would have left over after selling your property. We account for any capital gains tax, realtor fees and other transaction taxes and expenses that you would have to pay when selling your property.

How We Calculate the Costs of Renting

Calculating rental expenses is more straightforward. We take the initial rent amount you entered and then use the inflation rate, which you can also adjust, to calculate rental payments in the future. You can also add rental insurance or other expenses at your discretion.

Mortgage data: We use live mortgage data when calculating your home affordability.

Closing costs: We have built local datasets so we can calculate what closing costs will be in your neighborhood.

Selling expenses: Our data partnerships allow us to accurately estimate the costs incurred during a home sale.

Taxes: We calculate taxes on a federal, state and local level. The implications of real estate taxes, mortgage interest, mortgage points, mortgage insurance and other factors (including if you do or do not pay the Alternative Minimum Tax) are all considered in our models.

Home maintenance expenses: We calculate maintenance fees based on an “Annual Maintenance Fee” (which is a % of the home value) and “Monthly Additional Expenses” (which are fixed expenses that grow with inflation).

HOA fees: We assume that HOA fees are a fixed expense and that they grow with inflation.

Homeowner’s insurance: We assume homeowner’s insurance is a percentage of your overall home value.

The Rent vs. Buy Decision

For a long time, the common wisdom was that buying a home was a far better financial choice than renting one. Throughout the second half of the 20th century, and into the first years of the new millennium, home prices across much of the country marched steadily upwards, and a house was considered the safest investment around. The logic was simple: if you were spending 30% of your income on housing anyway, might as well spend that hard-earned dough on something that will retain its value for you in the future. Renting, in contrast, was like lighting your money on fire and tossing it in the trash.

That all changed in 2007, when the housing bubble that had been silently growing suddenly went pop. A house, it turned out, could lose value—and, as some real life cases demonstrated, could do so in spectacular fashion. There were stories of totally abandoned neighborhoods outside of Las Vegas, and half-constructed mansions in Florida. Those with the misfortune to buy at the peak of the market in 2006 lost thousands or even millions of dollars overnight. Mortgages went underwater. A foreclosure crisis ensued. Meanwhile, the renters of the world were doing relatively well.



Today, there is no clear right answer to rent vs buy. In some cities, and for some individuals, buying a home may make more sense, while for others, renting a home may be the better choice. What makes sense for Nina in New Orleans and Steve in San Diego may not make sense for Dan in Denver and Christina in Chicago. So how does one decide the answer to this question of, Should I rent or buy?

Time is of the essence

Perhaps the most important factor to consider when making this decision is how long you plan to stay in your home. If you’ll only be in town a year, renting will almost always be your obvious best choice. If you’re planning on packing up and leaving 12 months down the line, you probably don’t want to spend the time and money necessary to buy a house: think down payment, closing costs, loan charges, appraisal fees and so on. All told, the upfront costs of finding a house and taking out a mortgage can be in the tens of thousands of dollars (or higher!). As a renter, at worst you’ll have to pay a small application fee and make a refundable security deposit of a few months’ rent.

On the other hand, if you plan on staying put for 50 years, renting almost always makes no sense. In the long run, there are significant advantages to homeownership, one of the largest being the mortgage interest deduction, a tax benefit that allows you to deduct mortgage interest payments from your taxable income. For example, if you have a $2,000 monthly mortgage payment, and $1,500 of that goes toward interest, you can deduct that $1,500. So, your taxable income will be $1,500 lower. If we assume you pay a marginal tax rate of 30%, you would pay about $450 less in taxes each month by taking that deduction (30% x $1,500 = $450).

Rental payments, in contrast have no such advantages. Indeed, while a portion of each mortgage payment goes toward increasing your stake in your home by increasing your equity, rental payments go entirely to your landlord, and tend to grow over time. In the long run, the costs of renting can be much higher than buying.

So, if renting is better in the short-run and buying is better in the long run, when does the financial logic switch? When, in other words, do the long-run costs of renting begin to outweigh the upfront costs of buying? It could be three years, or seven or 15. The timing depends largely on where you live.

Rent vs. buy examples

As the saying goes: all real estate is local. That has never been truer than it is today. Some housing markets are booming and others are stagnant, and while in some cities rents have taken off, in others they remain as low as ever.

Take Atlanta, for example. Home prices there rose by about 4.4% over the past three years, while rents on two-bedroom apartments jumped 3.4% over the same time period. At those rates, it would likely make more sense for a person looking for a typical two bedroom home to buy if she planned on staying just two years.

In a city like San Francisco, where a typical house can sell for upwards of $500,000, the math can look a little different but the results are the same. Rents in San Francisco have jumped a whopping 8% in the past year, and home prices rose even more rapidly than that, by over 10% according to the Case-Schiller Index. If those rates hold, a San Franciscan staying in town for more than two years should buy now—if she can afford it.

New York City is a different story. Home prices in New York’s notoriously difficult housing market rose just 1.45% over the past three years, while rents over that period rose by around 5%. Even if you were able to find a two-bedroom for $350,000, it would only make financial sense to purchase it if you planned on staying put for a full 18 years.

The Big Apple is a big outlier when it comes to your rent or buy decision, however. Most cities in the U.S. are like Minneapolis, where home prices have risen 7% over the past three years, and rent for the average two bedroom apartment has gone from $960 to just over $1000, a 4.3% increase. In Minneapolis, a person looking for a typical house should buy if he plans on staying at least two years and has the money available for the upfront costs.

A Matter of opinion

Of course, while analyses like the above assume you are making your decision for purely economic reasons, there are other, non-financial factors that you may want to think about as well. Many renters, for example, enjoy the flexibility of being able to change pads at the end of their lease. For a homeowner, if you want to move, there’s quite a few hoops to jump through: find a real estate agent, get the house listed, meet with prospective buyers, accept bids, make a deal and, eventually, pay a bunch of fees to close the sale. Getting all of that done can take months, and can be very expensive.

On the other hand, buying a home gives you year-to-year continuity. Rents can change drastically over the course of just a few years, and there’s the ever-looming threat of eviction if a rent increase proves too much for you to afford. Most of the time as a homeowner, you won’t face any spikes in your payment (adjustable rate mortgages are one exception), and you won’t have to worry about being tossed out on the street if your payment becomes too expensive.

Then there’s the question of maintenance: fixing leaky pipes, painting, cleaning gutters—these are all costs of owning a home, but many homeowners enjoy putting time and energy into their homes. By the same token, many renters complain of unresponsive landlords who refuse to deal with things like bad plumbing or a faulty fridge.

In the end, the rent vs. buy decision comes down to your preferences and planning. If you know exactly how long you want to stay in your home and where you want to live, and you have some money saved up, the decision could be as easy as calculating which option will cost you less. If your future is less clear, however, you may have more to consider.

Rent vs. Buy: The Best Places to Own a Home

SmartAsset’s interactive buy vs. rent map highlights the places where buying a home is better than renting based on the number of years you plan on staying in your home. The top 10 counties identified below are those places where buying becomes a better financial option than renting in the shortest amount of time.

See where buying is better than renting after years
Renting is Better
Buying is Better
Rank County Breakeven Year Avg. Monthly Mortgage Payment Avg. Monthly Rent Avg. Home Price

Methodology Where is the country’s strongest buyer’s market? To answer that question, SmartAsset gathered data on average rents and home prices, and compared buying to renting in every county in America.

Specifically, we compared the total costs of buying and renting a typical home or rental in each county, for a household earning $100,000 a year. For the “buy” scenario, we made the following assumptions: a mortgage rate of 4.5%, closing costs of $2,000, and a down payment of 20%. For each county, we found the breakeven point in the buy vs. rent decision— the point at which the total costs of renting become greater than the total costs of buying.

The counties with the shortest time to break even are the best places to buy.

Sources: US Department of Housing and Urban Development, US Census Bureau 2012 American Community Survey

How Long You Have to Live in America’s Biggest Cities for Buying to Make Sense

Housing markets in major cities are often far more competitive than those in small towns or rural areas. That affects the rent vs. buy decision, as potential homebuyers in metros frequently face significantly higher prices, fees and closing costs. Those high upfront costs can mean that it only makes sense to buy for homeowners who are willing to stay put for a longer timeframe.

With that in mind, SmartAsset took a closer look at the data on renting and buying in the largest U.S. markets. We determined the breakeven point, the time it would take for a homeowner to recuperate those upfront costs of buying a home. (For more on our methodology, check here.)

Developments like the boom in tech jobs and increased migration to sunny West Coast cities have shifted housing economics towards renting in some parts of the country, while in other areas, like the South and Texas, buying is still usually the better bet.

New York City

  • New York: 18.3 years (to recuperate costs of buying)
  • The Big Apple’s housing market is notoriously competitive, and indeed, SmartAsset’s research shows it is the worst urban market for homebuyers in the country. Good deals are nearly impossible to come by and when an attractive option appears on the market, it is often snapped up in days if not hours. That competition bids up prices, which means homes are comparatively more expensive than rentals. The typical New Yorker would need to stay in her home more than 18 years to justify buying instead of renting.

    The Tech Hubs

  • San Jose: 16.73 years
  • Seattle: 14.9 years
  • San Francisco: 14.6 years
  • The boom in high technology over the past few years has generally been concentrated in a relatively small number of cities. It has been especially pronounced in the Bay Area and in Seattle. The growth in high-paying tech jobs in these cities has had profound consequences on their homebuying markets.

    In these three cities buying a home only makes financial sense for those who can stay put for at least 14 years (on average). Take note, however, of rising rents. If rents in these cities continue to increase over the next few years, buying may become a more sensible medium-term option for those who have the cash to cover closing costs and a down-payment.

    The Sunny West Coast

  • Orange County: 10.8 Years
  • Los Angeles: 8.8 years
  • San Diego: 8.6 years
  • Honolulu: 8.6 years
  • In these four western cities, the weather is great, populations are growing quickly, and renting usually beats buying. Average home prices in these cities aren’t quite as high as in the tech hubs or New York, but they are still outside the range most residents would consider affordable. On average, homebuyers in these cities recuperate the costs of buying (instead of renting) after 8 to 11 years.

    Portland

  • Portland: 6.9 years
  • As usual, this Oregon city defies categorization. It hasn’t experienced the boom in tech jobs of its neighbors to the north (Seattle) and south (San Francisco), and the weather in Portland isn’t the draw that is in other Western cities. Yet, the average home in Multnomah County costs over $315,000 (50% more than the U.S. average) and population growth has been steady. Those factors place Portland in a middle ground between buying and renting: for the average Portlander, buying makes sense if she plans on staying put for seven years or more.

    Old Money

  • Washington, D.C.: 6.5 years
  • Boston: 6.3 years
  • D.C. and Boston have historically been among the most expensive housing markets in the country. In these cities, high up-front costs tilt the economic logic away from homebuying for residents who may plan to move around in the near future (recent graduates, for example). But residents who are settling down for the long-term (like more than 6.5 years) could be better off buying.

    The Wild West

  • Riverside: 5.8 years
  • Phoenix: 5.7 years
  • Denver: 5.4 years
  • These three western cities are experiencing strong population growth, which has put some upward pressure on home prices. In these cities, residents who are comfortable staying in one place for the medium- or long-term should at least consider buying. On average, they will recuperate the high up-front costs of purchasing (instead of renting) in five to six years.

    The Midwest

  • Pittsburgh: 4.3 years
  • Chicago: 4.2 years
  • Minneapolis: 4.2 years
  • Especially compared to the west and the northeast, buying and renting in the Midwest are both relatively affordable—but because homeownership also increases a person’s net worth over time, buying often makes more sense in the medium- and long-term. The average homebuyer in one of these Midwestern cities should recuperate the upfront costs of closing on a home in just over four years.

    Texas and the South

  • Houston: 4.2 years
  • Tampa: 4.1 years
  • Charlotte: 4.1 years
  • Atlanta: 4.1 years
  • Miami: 4 years
  • Austin: 3.7 years
  • St. Louis: 3.6 years
  • Dallas: 3.2 years
  • Traditionally the most affordable parts of the country (for homebuyers), Texas and the south lived up to their reputation in our analysis. In every major southern or Texan city we examined, the average resident would recuperate the up-front costs of homebuying within just four and a half years of closing. After that, the savings would begin to accumulate.

    Philadelphia and Detroit

  • Philadelphia: 2.9 years
  • Detroit: 2.6 years
  • These two cities buck all the trends. Both have seen their populations fall in absolute terms in the past 50 years (Philly’s by 25% and Detroit’s by 50%). The result is a housing supply far larger than demand, and, in turn, bargain basement prices. On average, a resident of either of these cities should only stay in a rental if she might be moving in the next 3 years.