My very own Rent vs Own Calculator
UPDATED: IrvineRenter found a glitch in how I calculated total cost of owning. I fixed this problem, and here is the new link.
After the complaints about the last calculator I linked to, I took a shot at writing my own Rent-Vs-Own calculator from scratch. Here's the screenshot of it. (the space on the right is where a large report is generated. This report includes all kinds of neat details about it)
It's a simple windows application. You will want a screen resolution of 1280 wide to comfortably use it, but you can use it smaller if you just move it back and forth a lot. I compared some of the calculations to bankrate's for doing amortization, and I'm very close. They calculate it monthly (which is more accurate), while I do all the calculations yearly. The difference is very minor though.
Here is the link to go download it. I have it posted to rapidshare right now. You can download it without signing up, they just make you wait like 20 seconds or something. It's very small, the zip file is only 115k. So, make sure you left click that link, pick the server, and then it should download.
The default I put in are the historical averages and a current approximate interest rate (for stellar full-document loans). You can adjust any of the figures as you see fit. There may be some glitches in this, and I invite you to let me know right away so I can fix them and get a new version out.
(note, the simulator will allow you to do things that you probably couldn't get a bank to go along with... like 5% pay option loans, etc...)
Explanation of parameters:
Loan 1&2: Select a principal+interest, interest, or pay option loan. If Pay Option is selected, the percent that you are paying is selected in the "Percent of Interest" box. The loans can be on completely different terms.
Rate 1 &2: The interest rate for each loan. You'll probably not get the rates that I put in for default. They are the best rates right now. Expect to pay something about 1% higher unless you really have your financial ducks in a row.
Percent 1&2: The percents and the Down Payment amount are forced to add up to the purchase price. If you adjust one, the others will automatically adjust. The best way to do this is just adjust the Down payment first, and adjust the loans.
Factor in PMI: PMI is 0.5% of the loan balance on the primary loan ONLY, and it is only charged when the amount on that loan is higher than 80% of the purchase price. So, you can safely just leave this box checked, and it won't affect an 80/20 loan calculation at all.
Origination Fee: Whatever is charged by your loan officer. Some banks don't charge any origination fee.
Closing Costs: These are just a ballpark for non-recurring fees. It's not too important what you put in this.
Purchase Price: The price you paid for the property.
Down Payment: How much you put down that was applied towards the principal.
Equivalent Rent: How much would it cost per month to rent. Be honest with yourself here. While it's a good experiment to use the same place, some people have different standards for renting and owning. (maybe higher or lower) Myself, I'm happy to live in a place I can rent for 1500, but I'd want to own a place that I could rent for 2400. (and mortgage would probably be double that)
Monthly HOA: Self-explanatory
Tax Rate: Property tax rate. Usually 1.25, but it may be higher if you have Mello Roos. (or lower if you are a senior citizen and qualify for the reduction)
Expected Yearly Appreciation: House appreciation yearly. Historically, this is 6.7% a year. Even the most bullish people are predicting a lot less than that for the near term, but you should use your own numbers. Enter in whatever you think is fair. (it will accept negative appreciation)
Yearly Expenses: Insurance, Maintainence, etc...
Sales Expense: How much will it cost you to sell this place. 6% if you go with the norm, but you can do it for cheaper through many services.
Expected Monthly Income from Prop: Enter a value here if you plan to rent a room or a parking space out to offset your mortgage.
Yearly Rent Increase %: How much will rent go up each year. This is typically tied to inflation, and 2.5% is a good number to work with for that.
Invest the Differences in: This simply presets to the Custom Rate on the right with an estimated rate of return for various investment vehicles. Obviously lower return is a safer investment. The most risky one listed is a S&P index which has gone up 11% YOY historically.
Custom Rate: Set this to whatever you think you will get back from your investments.
Your Tax %: This is your top tax bracket. If you are barely in a tax bracket (like less than a few thousand), you might want to enter the next lower tax bracket to make it more accurate.
Years Before you plan to sell: Self-explanatory
Enjoy! Sorry this will only run on Windows, but I'd be happy to supply the source code if anyone wants to port it to Mac or Linux. I may make a PDA version of it if the demand is there.
After the complaints about the last calculator I linked to, I took a shot at writing my own Rent-Vs-Own calculator from scratch. Here's the screenshot of it. (the space on the right is where a large report is generated. This report includes all kinds of neat details about it)
It's a simple windows application. You will want a screen resolution of 1280 wide to comfortably use it, but you can use it smaller if you just move it back and forth a lot. I compared some of the calculations to bankrate's for doing amortization, and I'm very close. They calculate it monthly (which is more accurate), while I do all the calculations yearly. The difference is very minor though.
Here is the link to go download it. I have it posted to rapidshare right now. You can download it without signing up, they just make you wait like 20 seconds or something. It's very small, the zip file is only 115k. So, make sure you left click that link, pick the server, and then it should download.
The default I put in are the historical averages and a current approximate interest rate (for stellar full-document loans). You can adjust any of the figures as you see fit. There may be some glitches in this, and I invite you to let me know right away so I can fix them and get a new version out.
(note, the simulator will allow you to do things that you probably couldn't get a bank to go along with... like 5% pay option loans, etc...)
Explanation of parameters:
Loan 1&2: Select a principal+interest, interest, or pay option loan. If Pay Option is selected, the percent that you are paying is selected in the "Percent of Interest" box. The loans can be on completely different terms.
Rate 1 &2: The interest rate for each loan. You'll probably not get the rates that I put in for default. They are the best rates right now. Expect to pay something about 1% higher unless you really have your financial ducks in a row.
Percent 1&2: The percents and the Down Payment amount are forced to add up to the purchase price. If you adjust one, the others will automatically adjust. The best way to do this is just adjust the Down payment first, and adjust the loans.
Factor in PMI: PMI is 0.5% of the loan balance on the primary loan ONLY, and it is only charged when the amount on that loan is higher than 80% of the purchase price. So, you can safely just leave this box checked, and it won't affect an 80/20 loan calculation at all.
Origination Fee: Whatever is charged by your loan officer. Some banks don't charge any origination fee.
Closing Costs: These are just a ballpark for non-recurring fees. It's not too important what you put in this.
Purchase Price: The price you paid for the property.
Down Payment: How much you put down that was applied towards the principal.
Equivalent Rent: How much would it cost per month to rent. Be honest with yourself here. While it's a good experiment to use the same place, some people have different standards for renting and owning. (maybe higher or lower) Myself, I'm happy to live in a place I can rent for 1500, but I'd want to own a place that I could rent for 2400. (and mortgage would probably be double that)
Monthly HOA: Self-explanatory
Tax Rate: Property tax rate. Usually 1.25, but it may be higher if you have Mello Roos. (or lower if you are a senior citizen and qualify for the reduction)
Expected Yearly Appreciation: House appreciation yearly. Historically, this is 6.7% a year. Even the most bullish people are predicting a lot less than that for the near term, but you should use your own numbers. Enter in whatever you think is fair. (it will accept negative appreciation)
Yearly Expenses: Insurance, Maintainence, etc...
Sales Expense: How much will it cost you to sell this place. 6% if you go with the norm, but you can do it for cheaper through many services.
Expected Monthly Income from Prop: Enter a value here if you plan to rent a room or a parking space out to offset your mortgage.
Yearly Rent Increase %: How much will rent go up each year. This is typically tied to inflation, and 2.5% is a good number to work with for that.
Invest the Differences in: This simply presets to the Custom Rate on the right with an estimated rate of return for various investment vehicles. Obviously lower return is a safer investment. The most risky one listed is a S&P index which has gone up 11% YOY historically.
Custom Rate: Set this to whatever you think you will get back from your investments.
Your Tax %: This is your top tax bracket. If you are barely in a tax bracket (like less than a few thousand), you might want to enter the next lower tax bracket to make it more accurate.
Years Before you plan to sell: Self-explanatory
Enjoy! Sorry this will only run on Windows, but I'd be happy to supply the source code if anyone wants to port it to Mac or Linux. I may make a PDA version of it if the demand is there.
posted by Sven at
1:30 AM
9 Comments:
Sven,
I think there is an error on your "net cost of buying" calculation. I think you are considering the cost of the house as an expense which drastically impacts the cost of ownership in a negative, unrealistic way.
I plugged in a bunch of zero values for growth to make the math easier to check, and I used inputs that should make ownership the better alternative, and it still wasn't. I think if you take the purchase price out of the cost of ownership, the results will be accurate.
Also, where did you find the 6.7% appreciation rate? I heard the historical rate of appreciation nationwide was 0.7% over inflation. This should make it about 4%. Perhaps the 6.7% is factoring in the current bubble? I don't know. In my opinion, the rate you select for appreciation should be about 1% greater than the rate you put in for rental growth. The two tend to move together.
By
irvinerenter, at 8:44 AM
You are right! I calculate the total expense for owning by Equity (which includes appreciation) - Origination - Closing - principal left on both loans - the cost of ownership - Commission.
I'm going to change this to Equity (without appreciation) + Current value of property (with appreciation) - Origination - Closing - Principals left on both loans - Cost of Ownership - Commission. This should adjust the figures by several hundred thousand dollars. You'll also notice that the quity column doesn't go up as fast anymore because I don't tack appreciation onto it. I'll put the appreciation into a seperate variable (easier to track)
Expect a new version in a minute or two here. I'll just update the post.
By
Sven, at 11:52 AM
The calculator seems to work well now. I wish there was a way to clear the printout on the right as it fills up after a number of trials and you need to close and reload the program.
This is a powerful tool. I hope this gets circulated around the net. The thing that strikes me is how important the rate of appreciation is to the calculation. With the extreme leverage available to home buyers, the rate of appreciation is magnified. You can plug in the most ridiculous purchase price and the worst terms conceivable, and you can still make it work if you put in a high rate of appreciation. Of course the reverse is also true: when you put in a negative appreciation, almost any price is too much. I like putting in zero growth rates to calculate the theoretical purchase price that balances to a specific rental rate.
I really like that this calculator gives an accurate picture of the rent versus own equation. The Yahoo calculator is extremely biased against rental because it ignores the savings and investment component associated with renting. This calculator solves that problem.
Good work Sven.
By
irvinerenter, at 2:57 PM
You hit on a good point there. Even if you could say that real estate was going to be flat for two years (which is highly optimistic at this point), it's still not a good investment because the only way the current prices can be justified is if appreciation is still double digits. It's funny, the bubble crowd typically argues that it's not a good idea to buy because prices might go down, but the truth is that even staying the same or small appreciation makes it a horrible investment because of carrying costs.
Glad you like the tool, I'll get that change you requested in there as well. Another thing I might add is an export ability so you can save it all as a csv file and load it directly into excel or OpenOffice calc. That way you could chart the benefit of ownership over time.
By
Sven, at 6:04 PM
That calculator is a fantastic tool, you should spread it around the net.
When it gets down to it, leverage and appreciation are the keys to home ownership as an investment. This also makes it very risky.
I simply do not look at a house as an investment: house markets are only liquid during good times, the transaction costs are very high, and the carry costs are very high. Compare the stock market to the housing market: stocks are very liquid, the transaction costs are a few bucks as opposed to 6%, and instead of paying taxes, insurance and maintenance, you actually get dividends. To me a house is a necessary evil, if it is cheaper to rent, I rent: if it is cheaper to own, I will own, but I don't try to pretend it is a good investment.
I think of all the people using insane amounts of leverage to get into these homes, and there is no downside limit. Even in the commodities or futures markets where you can use similarly insane levels of leverage, they will close out your account if you drop to zero.
Anyway, great work on that calculator. As it circulates you might get some more ideas for tweaks.
By
irvinerenter, at 8:02 PM
Sven,
I hope you don't mind, but I plan to circulate your calculator around my office.
By
irvinerenter, at 9:19 AM
Please do. Let me know what features people want. I plan to release a new version at some point that will graph the "benefit or loss of ownership" over time.
By
Sven, at 10:25 AM
it crashes after first simulation. If you just adjust the price of the home the % of first loan to % of second goes haywire. Cannot fix it unless you exit, if you run it it will lock up (divide by 0?)
By
Anonymous, at 1:28 PM
Oh, thanks for the bug report. I'll see if I can get that fixed in the next version. In the mean time, try changing one of the %'s of the two loans AFTER setting the price on the house. They set relative to each other and relative to the down payment. So it's the down payment/total price is how much is paid off already. Then whatever you set one loan to, the other one will automatically adjust to fill in the remaining to make it all total 100%.
I'm sorry for the slow updates on this. I'm working a lot of hours lately, but I will try to get a new version out before the end of the year.
By
Sven, at 1:47 PM
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