Before you decide whether you should rent or buy a house, there are many factors to consider that are both qualitative and quantitative. The Perch rent vs buy calculator strictly looks at the quantitative and at a high level, makes the following assumptions:
- Rents increase by the legal limit each year
- The monthly amount you save by renting instead of owning a home is invested and earns a monthly compounding rate of return.
- Home prices will grow by their 10 year average unless you define an expected property growth rate.
- Factor in all closing costs (land transfer taxes, legal, mortgage insurance, etc) associated with buying a property today and closing costs (realtor commission, legal, etc) associated with selling the property in the years you defined using the forecasted value.
- You incur the full overhead associated with the property. This includes utilities, property taxes, maintenance and condo fees, if applicable.
- A dollar today is not worth a dollar tomorrow. We discount all projections to their value today.
The qualitative factors include understanding the financial responsibilities of renting and buying as well as the risk and rewards. You must also be prepared for emotional factors as buying a home is one of the largest investments you will make in your lifetime. One important thing to consider is the length of time you plan on staying in that home. If you plan on staying for the long term it could be more cost efficient to purchase a property, as the value may go up over time and the costs to purchase or sell will be spread out over a longer period of time. If you don’t plan on staying for long, it would be better to rent.
For example, if you buy a $400,000 property with an annual appreciation rate of 3%, your home will be worth $970,905 after 30 years. If you decide to sell your property after 30 years, assuming you pay closing costs of 5% of your home’s value, that is an expense of $48,545. However, your property value has gone up by $570,904 which will fully cover your closing costs.
If you purchase the same house at $400,000 with the same 3% growth rate, then your house will be worth $412,000 after one year. If you decide to sell after one year, your assumed closing costs of 5% would now be $20,600. Your home has appreciated by $12,000, which does not cover your closing costs of $20,600 since you only owned the house for 1 year.
Use our rent vs buy calculator to determine whether the cost of renting would be lower than the cost of buying or vice versa. We estimate the likelihood of the home appreciating enough (based on historic growth rates) to determine how likely you’d earn more as a homeowner than a renter.