Now that I think about it some more, the rent versus buy decision ought to be continuous, not just at the point of deciding to buy. It’s like shorting a stock. But there’s no way to short my home. Considering that the gap is above 50% (“buy” being 50% more expensive than “rent”), maybe it’s time to sell my home and rent instead? Zillow says it’s worth nearly $1.4M which is insane, but possible, I only paid about $230k in 1999 for it. Of course, that’s only a 7.2% IRR which isn’t particularly exciting.
Right. My home has almost quadrupled in value over the past 11 years, but I’m unlikely to see that kind of appreciation over the next 11 years.
Of course, if your home is only a small percentage of your net worth, the hassle of selling the home and moving to a rental may not be worth the payoff. “Rent vs. Buy” is a bigger deal for those in the wealth accumulation phase of life, or at least it should be.
That’s the significant question. Most homeowner’s ignore a lot of costs. Up until recently, the mortgage industry only included the mortgage payment and property taxes in the calculation on whether your income was large enough to afford the home. Now I’m seeing insurance costs on zillow, which weren’t there a few years ago. It seems like people are still ignoring maintenance costs which can vary from 1% per year in a dry, temperate climate like Salt Lake City, to 3%+ of home value in coastal Florida. Many retirees who buy into aging, high-rise Florida beach condos are surprised when the homeowner’s association does the 40-year structural integrity survey and they find that the assessment for the decades of deferred maintenance is more than their purchase price.
Very very very few of them, just the initial purchase price and the estimated sales price. It’s a VERY rough calculation and essentially meaningless. It’s meaningless because the cash flows were all over the place - 20% down, then mortgage payments for 11 years, then a different mortgage payment for 15 years, there was a big remodel one year, then some smaller remodels, and taxes and insurance of course, and all sorts of other miscellaneous cash flows (like pressure cleaning, pest control, new hot water heater, new A/C units every 12 years, etc).
The point is that is homes are overvalued compared to rents right now, then it might be financially beneficial to “short” (sell) a home and switch to rent instead. Because if history is any guide, the ratio will converge once again someday.
Adding all of the maintenance costs will decrease IRR of course. However, you would receive the economic value of shelter and it seems like this should be represented as a cash flow in your favor some how (I’m uncertain how to do this, maybe add in the market rent for a comparable residence).
Another way is run the cash flows to maintain the shelter over your head for rent versus own and compare the costs. I’m guessing this is what people do when they try to make this comparison, but it would be conceptually the same as above when the economic value of shelter is added in as rent for a comparable residence.