[net.taxes] Is renting cheaper than buying?

fulford@altos.dec.com (Mike Fulford, MS: UCC, DTN: 544-1313) (10/10/86)

The following analysis was obtained the Consumer Reports magazine, May 81.

Is it cheaper to rent an apartment or own a home? Everyone has a different
answer here, of course. The truth is, like a car, stereo, or a yacht, a
home is a utility investment. The standard of living of course is much
higher than renting, but then so is the cost. Probably the widest 
economic myth in America is that "owning a home will be the best
investment that you will ever make." Just ask your parents they will tell
you that without a second thought (parents are by default economics 
experts as all during your life as a child they taught you what you 
could and could not afford!) Owning your home and living in it until
paid for, or using it as income property, is a different case indeed.

What this is about is the pure economics of buying, living in, and
selling your home. Take for instance a single peron with a net worth of
< 30K, making $30K/year. Would it be worth it to him to buy and live in 
a financed home? That all depends on many things. In a purly monitary
sense, he could come out miles ahead by renting and investing the extra
monies in better investments.

The following is a summary of the diffence in costs between owning an
average sized home, in an average suburban mid-USA setting, to an 
2 bedroom apartment in the same area. Here's the story dollar by dollar.
The bottom line answer may surprise you:
-------------------------------------------------------------------------
General terms- these are national averages from 1970-1980 and are not
               to be used as a comparison with your own situation.
-------------------------------------------------------------------------

Inflation- is calculated in every line entry unless otherwise averaged
           (the averaged rate of inflation for the years 1976-1986 was
           7.15%.) This is not to say that the this example is a 
           reflection of those exact years!
Proper investing- a 7% yield after taxes is considered to be par.
The apartment is a large two bedroom, 2 bath, 2 carport, in midtown USA
The house is a 3 bedroom, 2 bath, two car garage, with average 1/10 acre
 of yard space. Bought in 1970 for $50,000, and sold in 1980 for $100,000
 in midtown USA, and has 1000 cu/ft more space than the apartment
Value of house- keeps pace with the average inflation rate of 7.15%
                (as do the property taxes)
Profit- this is the nominal profit of $50,000 (before the real costs)
Taxes on profit- not taxed as it is assumed to be reinvested
-------------------------------------------------------------------------
Renters world
------------------------------------------------------------------------
Rent of $300/month for the first year with 7.15% increases every year.
Insurance- fully covered average of $100/year
Rent deposit- $300
Renters credit- average tax savings of $20/year
Utilites- inflation averaged at $50/month
-------------------------------------------------------------------------
Cost of living in the financed home
-------------------------------------------------------------------------
Down payment- average of 20%= $10,200 ($51,000 - 10,200= 40,800 financed)
Closing costs- 1975 average of $4700 (again, a stray example!)
Interest- 13% fixed
Points= 2 ($1,000 added to the $50,000 price, in this case the $1K was
        sutracted from the down payment. I had to stick with my reference
        material!)
Legal fees- $75
Inspections- $50
Interest- 98% first year, 97%, 95%, 93%, 90%, 85%, 80%, 74%, 69%, 62%
          are close to the norm of a simple interest mortgage.
Property taxes- at a national of average of 1.72%
Interest write off- State and Fed combined average bracket of 30% (less 
                    the average deductable of $1750)
Insurance- fully covered average of $200/year, national average.
Payments- monthly mortgage payments for 30 years of $425/month
Maintenance- outside, inside, appliances- inflation averaged at $100/mo.
Garbage pickup- inflation averaged at $5/month, national avarage.
Sewage- inflation averaged at $2/month, natioal average.
Water- 20/month national average.
Utilities- heat, cooling, electric, hot water, ect- inflation averaged at
           $175/ month, national average.
Tax preparation- average of $200/year, national average.
Time as money- every hour of someones time has an economic worth. A rate
 of $10/hour is used here. For example, a well off person may have a 
 maid, plumber, gardener, ect, and would not spend thier time on 
 homeowners drudgeries (they could be playing the financial markets with
 the extra time, ect), whereas thier average rate of pay may be $10/hour.
 Persons not so well off would of course do the work themselves (or pawn
 it off on the wife and kid... but we won't get into those economics!)
------------------------------------------------------------------------- 
National average of time spent on homeownering-
 Time dealing with appraisers- 1 hour/year
 Time shopping and buying for-
  House itself- 50 hours 
  Lawyer- 5 hours
  Financing- 15 hours
  Tax preparation & and general home owner financial managment- 1 hour/mo 
  Permits, inspections, ect- 5/year
 Maintenance-
  Yardwork- 4 hours/week
  Interior work- 2 hours/week
  Shopping for home related items- 1 hour/week
  Dealing with contractors, ect- 5 hours/year
 Total time/year= 457 hours= $4,570 of worth of work.
===================================+=====================================
First year homeowners costs        | First year renters costs
-----------------------------------+-------------------------------------
Down payment=   10,200             | Rent=          3,600
Payments=        5,100             | Deposit=         300
Closing costs=   4,700             | Utilities=       600
Time in money=   4,570             | Insurance=       100
Utilities=       2,100             |                -----
Maintenance=     1,200             | Nominal total= 4,600
Property taxes=    920             |  
Insurance=         200             | Minus renters 
Tax preparation=   200             |  tax credit=      20
Water=             240             |                -----
Legal fees=         75             | Real total=    4,580
Trash=              60             |
Inspections=        50             |
Sewage=             24             |
               -------
Nominal total=  29,639
Tax savings=     4,952 (writing off closing costs, interest, property taxes
                ------  and tax preparation)
Real total cost=24,687
Homeowners real cost minus renters real cost= amount
 avaliable to invest= 20,107
Properly invested= difference of 21,514
===================================+=========================================
Second year homeowners costs       | Renters costs
-----------------------------------+-----------------------------------------
Payments=        5,100             | Rent=          3,857
Time in money=   3,705             | Insurance=       100
Utilities=       2,100             | Utilities=       600
Maintenance=     1,200             |                -----
Property taxes=  1,007             | Nominal total= 4,557
Insurance=         200             | 
Tax preparation=   200             | Minus renters  4,557
Water=             240             |  tax credit=      20
Trash=              60             |                -----
Sewage=             24             | Real total=    4,537
                 -----
Nominal total=   13,836
Tax savings=      2,752  (writing off interest, property taxes, 
                 ------   and tax preparation)
Real total cost= 11,083
Homeowners real cost minus renters real cost= amount avaliable
to invest= 6,546
Invested return for first year= 23,019
Plus return for second year=     7,004
                                ======
Total return on investment=     30,023
-----------------------------------------+-----------------------------------
Third year homeowner costs=              | Renters costs=
-----------------------------------------+-----------------------------------
Payments=         5,100                  | Rent=          4,132
Time in money=    3,705                  | Utilities=       600
Utilities=        2,100                  | Insurance=       100
Maintenance=      1,200                  |                -----
Property taxes=   1,058                  | Nominal total= 4,832
Water=              240                  | 
Insurance=          200                  | Minus renters
Tax preparation=    200                  | tax credit=       20
Trash=               60                  |                -----
Sewage=              24                  |                4,812
                 ------
Nominal total=   13,887
Tax savings=      2,696  (writing off interest, property taxes, 
                 ------   and tax preparation)
Real total=      11,191
Minus renters costs= amount avaliable for investment= 6,379
Amount from last two years= 32,124
Plus this years return=      6,825
                            ------
Total return on investment= 38,949
-------------------------------------+--------------------------------
Fourth year homeowner costs          |Renters costs
-------------------------------------+--------------------------------
Payments=       5,100                |Rent=        4,427
Time in money=  3,705                |Utilities=     600
Utilities=      2,100                |Insurance=     100
Maintenance=    1,200                |             -----
Property taxes= 1,133                |Total=       5,127
Water=            240                |
Insurance=        200                |Minus renters
Tax preparation=  200                |tax credit=     20
Trash=             60                |             -----
Sewage=            24                |Real total=  5,207
               ------
Nominal total= 13,962
Minus tax       2,466 (writing off interest, property taxes, 
savings=       ------  and tax preparation)
Real costs=    11,495
Minus renters costs= amount avaliable to invest= 6,388
Amount return from last years savings= 41,675
Plus amount from this years return=     6,835
                                       ------
Total return on savings=               48,510
--------------------------------+---------------------------------
Fifth year homeowners costs     |Renters costs
--------------------------------+---------------------------------
Payments=         5,100         |Rent=        4,743
Time in money=    3,705         |Utilities=     600
Utilities=        2,100         |Insurance=     100
Maintenance=      1,200         |             -----
Property taxes=   1,214         |Total=       5,443
Water=              240         |
Insurance=          200         |Minus renters
Tax preparation=    200         |tax credit=     20
Trash=               60         |             -----
Sewage=              24         |Real total=  5,423
                  -----         
Nominal total=   14,043
Minus tax         2,276 (writing off interest, property taxes,
savings=         ------  and tax preparation)
Real costs=      11,766
Minus renters costs= amount avaliable to invest= 6,343
Amount return from last years savings=    51,905
Plus amount from this years savings=       6,787
                                          ------
Total return on savings                   58,692
----------------------------------+----------------------------------
Sixth year homeowners costs       |Renters costs
----------------------------------+----------------------------------
Payments=       5,100             |Rent=        5,075
Time in money=  3,705             |Utilities=     600
Utilities       2,100             |Insurance=     100
Maintenance=    1,200             |             -----
Property taxes= 1,298             |Total=       5,775
Water=            240             | 
Insurance=        200             |Minus renters
Tax preparation=  200             |tax credit=     20
Trash=             60             |             -----
Sewage=            24             |Real total=  5,755
                -----           
Nominal total= 14,127
Minus tax       2,139
savings=       ------
Real total=    11,987
Minus renters cost= amount avaliable to invest= 6,232
Amount return from last years savings= 55,538
Plus amount from this years savings=    6,668
                                       ------
Total return on savings=               62,206
-------------------------------------+----------------------------
Seventh year homeowner costs/year    |Renters costs
-------------------------------------+----------------------------
Payments=        5,100               |Rent=         5,437
Time in money=   3,705               |Utilities=      600
Utilities=       1,200               |Insurance=      100
Maintenance=     2,100               |              -----
Property taxes=  1,301               |Total=        6,137
Water=             240               |
Insurance=         200               |Minus renters    20
Tax preparaton=    200               |tax credit=   -----
Trash=              60               |Real total=   6,117
Sewage=             24
                ------
Nominal total=  14,130
Minus tax        2,011 (writing off interest, property taxes,
savings=        ------  and tax preparation)
Real costs=     12,119
Minus renters costs= amount avaliable to invest= 6,002
Amount return from last years savings= 66,560
Plus amount from this years return=     6,656
                                       ------
Total return on savings=               73,216
------------------------------------+---------------------------
Eighth years homeowners costs/year  |Renters costs
------------------------------------+---------------------------
Payments=         5,100             |Rent=            5,825
Time in money=    3,705             |Utilities=         600
Utilities=        2,100             |Insurance=         100
Maintenance=      1,200             |                 -----
Property taxes=   1,494             |Total=           6,525
Water=              240             |
Insurance=          200             |Minus renters       20
Tax preparation=    200             |tax credits=     -----
Trash=               60             |Real total=      6,505
Sewage=              24             
                 ------
Nominal total=   14,323
Minus tax         1,854 (writing off interest, property taxes,
savings=         ------  and tax preparation)
Real total=      12,469
Minus renters costs= amount avaliable to invest= 5,964
Amount return from last years savings= 78,341
Plus amount from this years return=     6,831
                                       ------
Total return on savings=               85,172
-------------------------------------+-----------------------------
Ninth year homeowners costs/year     |Renters costs
-------------------------------------+-----------------------------
Payments=          5,100             |Rent=        6,241
Time in money=     3,705             |Utilities=     600
Utilities=         2,100             |Insurance=     100
Maintenance=       1,200             |             -----
Property taxes=    1,600             |Total=       6,941
Water=               240             |
Insurance=           200             |Minus renters   20
Tax preparation=     200             |tax credit=  -----
Trash=                60             |Real cost=   6,921
Sewage=               24             
                  ------
Nominal total=    14,429
Minus tax          1,742 (writing off interest, property taxes,
savings=          ------  and tax preparation)
Real total=       12,686
Minus renters costs= amount avaliable to invest= 5,765
Amount return from last years savings= 91,134
Plus amount from this years return=     6,168
                                       ------
Total return on savings=               97,302
---------------------------------------+---------------------------
Tenth years homeowners costs/year      |Renters costs
---------------------------------------+---------------------------
Payments=            5,100             |Rent=       6,241
Time in money=       3,705             |Utilities     600
Utilities=           2,100             |Insurance=    100
Maintenance=         1,200             |            -----
Property taxes=      1,715             |Total=      6,941
Water=                 240             |
Insurance=             200             |Minus renters  20
Tax preparation=       200             |tax credit= -----
Trash=                  60             |Real total= 6,921
Sewage=                 24
                    ------
Nominal total=      14,544
Minus tax            1,637 (writing off interest, property taxes,
savings=            ------  and tax preparation)
Real total=         12,907
Minus renters costs= amount avaliable to invest= 5,986
Amount return from last years savings= 104,113
Plus amount from this years return=      6,405
                                       -------
Total return on savings=               110,518
-------------------------------------------------------------------
House sold for=                     100,000
Price bought for=                    50,000
                                    -------
Profit=                              50,000

Total amount saved by renting=        110,518
Minus profit from selling home=        50,000 (non-taxable as reinvested)
                                      -------
Amount the finaced home cost           60,518
over the cost of renting=              
(or the amount you would have in your portfolio if
 you would have rented instead of financed a house.)

king@kestrel.ARPA (Dick King) (10/12/86)

   From: fulford@altos.dec.com (Mike Fulford, MS: UCC, DTN: 544-1313)
   Newsgroups: net.taxes
   Date: 10 Oct 86 19:57:24 GMT
   Sender: daemon@decwrl.DEC.COM

   The following analysis was obtained the Consumer Reports magazine, May 81.

   Proper investing- a 7% yield after taxes is considered to be par.
   The apartment is a large two bedroom, 2 bath, 2 carport, in midtown USA
   The house is a 3 bedroom, 2 bath, two car garage, with average 1/10 acre
    of yard space. Bought in 1970 for $50,000, and sold in 1980 for $100,000
    in midtown USA, and has 1000 cu/ft more space than the apartment

Why are you comparing a 2BR, 2 carPORT apartment with a 3BR, 2 car
GARAGE house?  Go all the way, compare a studio apartment with a
mansion, and REALLY make the renter come out ahead!

   ------------------------------------------------------------------------- 
   National average of time spent on homeownering-
    Time dealing with appraisers- 1 hour/year
    Time shopping and buying for-
     House itself- 50 hours 
     Lawyer- 5 hours
     Financing- 15 hours
     Tax preparation & and general home owner financial managment- 1 hour/mo 
     Permits, inspections, ect- 5/year
    Maintenance-
     Yardwork- 4 hours/week
     Interior work- 2 hours/week
     Shopping for home related items- 1 hour/week
     Dealing with contractors, ect- 5 hours/year
    Total time/year= 457 hours= $4,570 of worth of work.
   ===================================+=====================================
   First year homeowners costs        | First year renters costs
   -----------------------------------+-------------------------------------
   Down payment=   10,200             | Rent=          3,600
   Payments=        5,100             | Deposit=         300
   Closing costs=   4,700             | Utilities=       600
   Time in money=   4,570             | Insurance=       100
   Utilities=       2,100             |                -----
   Maintenance=     1,200             | Nominal total= 4,600
   Property taxes=    920             |  
   Insurance=         200             | Minus renters 
   Tax preparation=   200             |  tax credit=      20
   Water=             240             |                -----
   Legal fees=         75             | Real total=    4,580
   Trash=              60             |
   Inspections=        50             |
   Sewage=             24             |
		  -------
   Nominal total=  29,639
   Tax savings=     4,952 (writing off closing costs, interest, property taxes
		   ------  and tax preparation)
   Real total cost=24,687
   Homeowners real cost minus renters real cost= amount
    avaliable to invest= 20,107
   Properly invested= difference of 21,514

How many renters do YOU know who set aside the entire amount they are
saving by not buying a house?

You make the assumption that if I didn't spend all this time working
around the house, I would work for someone else for ten dollars
instead, and invest it.  Even if you BELIEVE that, the tax savings of
home ownership ought to reflect that the Time in Money is after tax
money, whereas when the renter earns $4570 in his second job he would
have to pay taxes.  Also, every renter I know of has to spend time
dealing with his landlord and often making repairs that the landlord
won't make.  When I rented I was still the one that had to wait for
tradesmen. 

I have NEVER paid $240 in any year for water.

I have NEVER paid $2100 in any year for utilities.  When I lived in
New Jersey, during the height of the energy crisis, in an oil heated
house, I paid 950/yr in oil, and 400 in other utilities (excluding
telephone, which I would have paid in an apartment).  

I did not have to pay anyone to do my taxes in the year I bought my
house.  The only time I did was when I was RENTING OUT two houses, and
it came to about $120.


THESE ARE QUIBBLES COMPARED TO MY MAIN EXCEPTION, which is that you
compare a 2BR apartment to a 3BR house.  You could either compare a
2BR apartment to a 2BR condo (I know of several complexes nearby where
approximately identical units can either be bought or rented) or a 3BR
house with a rented 3BR house.  If you do this, a lot of the expenses
come out the same, or even higher, in a rental property.  For example,
back in New Jersey where it matters, owner-occupied houses tended to
be better insulated than their rental counterparts.



-dick