Buying Vs Renting - A Comparison

[Neil B]

I rent a £250k house for £1k a month. I earn £180 a month after tax from my savings, so my net cost of renting is £820. I have about £90k in savings/deposit. If I bought the house I'd pay £636 per month interest in the first year of a capital repayment mortgage, that figure would fall to £558 after five years (whereas I expect rent to increase).

So I am currently seriously worse off renting (to the tune of £184 per month and rising), even before considering what HPI will be over the next five years. Renting is dead money to me.

I guess it all depends on your personal financial and geographical situation.

Thats only assuming that the value of your property increases. (Note - I say 'value' and not 'price' - the two are not the same thing). Right now values are dropping so you'd be in negative equity as soon as you bought a house. Why give away your money to a bank?

Edited April 21, 2010 by Neil B

[Lepista]

I rent a £250k house for £1k a month. I earn £180 a month after tax from my savings, so my net cost of renting is £820. I have about £90k in savings/deposit. If I bought the house I'd pay £636 per month interest in the first year of a capital repayment mortgage, that figure would fall to £558 after five years (whereas I expect rent to increase).

So I am currently seriously worse off renting (to the tune of £184 per month and rising), even before considering what HPI will be over the next five years. Renting is dead money to me.

I guess it all depends on your personal financial and geographical situation.

How are you working this out? Is this just the interest, and you're not considering the capital repayment?

Even at just 5%, your repayment mortgage would be £1,333 per month (£702 per month interest only) [this is a £168,000 mortgage taking into account all your cash pot less moving costs etc]

[toodimm]

I still think that you are grossly underestimating the rent that you would have to pay to live in a property that would sell for £350,000, I think that £2,000 pcm would be neared the mark and even that is probably on the low side. Are you renting from a friend or family member?

Just for you, in this version, I've put in some extreme figures the other direction. even doing this, the breakeven time period, with some modest HPC of only 2% falls per year, is just under 13 years!!!!

In both instances, the losses are huge, at just over £200,000 (average of about £16,000 loss per year).

Of course, renting is just dead money, isn't it?

any Bulls care to comment on the analysis...?

Edited April 21, 2010 by toodimm

[Bruce Banner]

I still think that you are grossly underestimating the rent that you would have to pay to live in a property that would sell for £350,000, I think that £2,000 pcm would be neared the mark and even that is probably on the low side. Are you renting from a friend or family member?

Really?

I'm renting a £380K(ish) house for £900 per month and I'd lose more than £900 per month in interest if I were to buy the house.

[Bruce Banner]

I still think that you are grossly underestimating the rent that you would have to pay to live in a property that would sell for £350,000, I think that £2,000 pcm would be neared the mark and even that is probably on the low side. Are you renting from a friend or family member?

Really?

I'm renting, on the open market, a £380K(ish) house for £900 per month.

I'd lose more than £900 per month in interest if I were to buy the house.

[Lepista]

I still think that you are grossly underestimating the rent that you would have to pay to live in a property that would sell for £350,000, I think that £2,000 pcm would be neared the mark and even that is probably on the low side. Are you renting from a friend or family member?

Not at all. Not related, didn't even know the bloke before we moved.

You're looking at it from the wrong angle - it's not that the rent is too low... the house price is too high.

Anyway, like I said above, the spreadsheet is a tool - put in the numbers that you feel are reasonable for your area. It's not for me to tell you what is right or wrong for your personal circumstances. Just use the tool for what it is - one of a vast number of other inputs to your decision making process.

As an aside, £2,000 per month for my area (NE) would give you a stonkingly good rental pad!

[pablopatito]

How much extra would you pay in household insurance, life insurance, home improvements, and maintenance, per year?

I still have to pay life insurance whilst renting to protect my family. Home improvements either add value to the house or improve my life in some way, so I'm discounting that. Buildings insurance isn't much. I don't know about maintenance - I've never paid our much in the years I have been a homeowner, but perhaps I've been lucky. My figures are based on the interest part of a five year fixed rate capital repayment mortgage, I haven't taken into account the capital part of the mortgage bill as that adds to my equity and I'm only interested in dead money.

When house prices were falling and I was earning 6% interest on my savings I was as happy as anything. But things have changed and as things stand I'm losing money.

[toodimm]

Not at all. Not related, didn't even know the bloke before we moved.

I was joking when I suggested that. I'm just trying to make the point that you are being charged an amazingly low rent relative to the price you claim the house would sell for.

You're looking at it from the wrong angle - it's not that the rent is too low... the house price is too high.

Different sides of the same coin, rent too low/price too high. Clearly whilst people are using houses as an investment, then house prices, rental prices and interest rates will be inextricably linked.

Anyway, like I said above, the spreadsheet is a tool - put in the numbers that you feel are reasonable for your area. It's not for me to tell you what is right or wrong for your personal circumstances. Just use the tool for what it is - one of a vast number of other inputs to your decision making process.

But you seem to be using your sheet to try and justify an argument. Whilst I agree with your argument, that it can be more economical to buy than rent, I don't think that the case is quite as clear cut as the numbers you have used suggest.

As an aside, £2,000 per month for my area (NE) would give you a stonkingly good rental pad!

And I imagine the same would be true for buying, if you had a £350,000 budget.

A simple BTL rent calculator can be found here, and for a £350,000 house, they recon £2100 needs to be charged per month.

Alternately if you just have a look on rightmove for some properties to rent (in almost any area of the country), then use google street view to find the house number, then use ourproperty to find the price that that house last sold for, then I think that you would find £350,000 houses do not get rented out for £805

Have a look at this property in the north east, does your £805 per month get you a four bedroom detached house with a double garage?

Your numbers give 2.6% yield before tax, which is very very low. Most landlords would charge a rent that would give a yield of at least 5% otherwise its not worth doing.

Edited April 21, 2010 by toodimm

[Lepista]

I still have to pay life insurance whilst renting to protect my family. Home improvements either add value to the house or improve my life in some way, so I'm discounting that. Buildings insurance isn't much. I don't know about maintenance - I've never paid our much in the years I have been a homeowner, but perhaps I've been lucky. My figures are based on the interest part of a five year fixed rate capital repayment mortgage, I haven't taken into account the capital part of the mortgage bill as that adds to my equity and I'm only interested in dead money.

When house prices were falling and I was earning 6% interest on my savings I was as happy as anything. But things have changed and as things stand I'm losing money.

Have you even actually put your own numbers into the spreadsheet? You might be surprised at what you come up with.

re. the maintenance, think about what you'd have to do over 25 years, then divide that figure up.

My landlord, in the 1.5 years I've been there, has:

- Replaced the toilet - £500 (special to match the bathroom suite)

- Cleaned the driveway, twice, by contractors, (£100 per go), and sealed the blocks (£200?)

- Cleaned the back patio (twice) @ £100 per go

- re-roofed the garage flat roof completely (it was leaking) (£1,500?)

- re-plastered a bit of the garage roof (£150?)

- Got a bloke in to do a bit of landscaping in the garden for us (cutting down some trees and the like) - (£150?)

Oh, fixed the washing machine, fridge & freezer that are all included with the house (built in) - £250?

So... I make that over £3,000, in about a year and a half.

If I'd wanted, he'd have had a gardener in weekly to mow the lawn for me, and plant out the garden. However, I quite like pootling and doing that myself (with the lawnmower and tools he provides for me).

Plus all the hassle, organisation, etc.

That doesn't include for the just landlord costs (which you wouldn't have if buying yourself).

So, even at a nominal maintenance cost, that works out at over £1,000 per year for maintenance.

I don't even hassle him for minor bits - I usually just fix the things for him (repairs to breaking cupborad doors, etc.)

[Lepista]

Alternately if you just have a look on rightmove for some properties to rent (in almost any area of the country), then use google street view to find the house number, then use ourproperty to find the price that that house last sold for, then I think that you would find £350,000 houses do not get rented out for £805

Have a look at this property in the north east, does your £805 per month get you a four bedroom detached house with a double garage?

I did update the 800 up to 1200 for you! so, taking the £1200 in the area you've shown gives This one.

For only £1,700 (way less than your 2,100 budget), you could get This!

Don't think the BTL link you've provided is particularly realistic - for the area you've chosen, anyway. Maybe down south?

[spongeh]

I was joking when I suggested that. I'm just trying to make the point that you are being charged an amazingly low rent relative to the price you claim the house would sell for.

Different sides of the same coin, rent too low/price too high. Clearly whilst people are using houses as an investment, then house prices, rental prices and interest rates will be inextricably linked.

But you seem to be using your sheet to try and justify an argument. Whilst I agree with your argument, that it can be more economical to buy than rent, I don't think that the case is quite as clear cut as the numbers you have used suggest.

And I imagine the same would be true for buying, if you had a £350,000 budget.

A simple BTL rent calculator can be found here, and for a £350,000 house, they recon £2100 needs to be charged per month.

Alternately if you just have a look on rightmove for some properties to rent (in almost any area of the country), then use google street view to find the house number, then use ourproperty to find the price that that house last sold for, then I think that you would find £350,000 houses do not get rented out for £805

Have a look at this property in the north east, does your £805 per month get you a four bedroom detached house with a double garage?

Your numbers give 2.6% yield before tax, which is very very low. Most landlords would charge a rent that would give a yield of at least 5% otherwise its not worth doing.

4 Bed double garage £400k house

This property was on the market for £400,000 and finally rented to the last tennant for £845 a month. The landlord has seen the error of his way and tried up the rent, but the new tennant payed around the £900 mark for it.

[Lepista]

I guess what it's looking like, toodimm, is that you're paying way over the odds for your rent... Find another place, man. and bargain them down!

The benefits of renting - it's easy to negotiate lower rentals. Try doing that with a mortgage.

[GBdamo]

Snip........ then I think that you would find £350,000 houses do not get rented out for £805

/Snip

4 Bed detached for rent

Same town

3 Bed detached for sale

And

3 Bed detached bungalow for rent

Same town

3 bed detached bungalow for sale

3 Bed detached bungalow for sale

Not to the penny, but ballpark enough. Examples to prove oterwise, and yes it does not make financial sense, well barely due to piss poor intrest rate.

Edited April 21, 2010 by GBdamo

[Lepista]

Anyway, that was a nice diversion.

So... back to the spreadsheet.

Anyone else have any interesting finds about how it would be better to buy now rather than rent?

[twatmangle]

..And how valid it is today for the waverers.

I made this a couple or three years ago, to show the costs of renting vs buying.

At the time, with higher interest rates, and nearly flat HPI, it made sense, over the short term, to rent rather than buy, by quite a margin.

Factoring in the falls since then, and the interest rates we are now seeing, It makes even more sense to rent rather than buy.

Enjoy.

Comments welcomed as to how I could improve the spreadsheet..

EDIT - see post #4 for the corrected spreadsheet. Can't seem to remove this one from here?

Not sure whether it's your spread sheet or my data but the outcome for me was:

Benefit of buying over renting £223,033

This is using genuine data, and nothing was fudged.

[pablopatito]

It seems clear from this thread that the financial implications of renting vs buying vary hugely depending on whereabouts in the country you are and shows how stupid it is for "property experts" to talk of the housing market as a single entity when in fact it is made up of hundreds of different markets - all with different characteristics.

[Lepista]

Not sure whether it's your spread sheet or my data but the outcome for me was:

Benefit of buying over renting £223,033

This is using genuine data, and nothing was fudged.

Do you have a large deposit, by any chance? It might be that you are getting an effective interest increase.

You might also want to lok at the scenario if the returns you get on your cash pot are better...?

Just a guess.

[twatmangle]

Do you have a large deposit, by any chance? It might be that you are getting an effective interest increase.

You might also want to lok at the scenario if the returns you get on your cash pot are better...?

Just a guess.

Yes, as a FTBer my deposit was quite high, so yes, you're right in your assumptions.

[noodle doodle]

Anyway, that was a nice diversion.

So... back to the spreadsheet.

Anyone else have any interesting finds about how it would be better to buy now rather than rent?

long term it's better to buy.

short term, it's better to rent.

why?

long term, as pointed out previously the amount you pay per month in interest drops off, and the capital payments take over. This also means the deeper and deeper you get into your mortgage term the less effect interest rate changes have on you. Plus interest rates can go down as well as up. Sure they'll go up from their present standing eventually. But there's also a chance they'll go down again afterwards. Your rental will go up and up as inflation only ever pushes in one direction, deflation is still a theoretical device in this country. In short, I'm paying 800 a month in a mortgage, if interest rates ****** me up I may have to pay 1000, 1200 on average long term. But in 20 years time your 800 rental will be 1750, assuming 4% inflation a year, and in the end I own a house.

However short term, if you're only planning on staying somewhere for 2/3 years it's probably not worth the arseache of buying, and it's not financially brilliant either

http://www.drcalculator.com/mortgage/uk/

This is a good page for calculating mortgages ^^^

[toodimm]

It's amazed me just how much prices vary across the UK. In a shitty but semi trendy area of London, an three bed ex-council flat was cheap at £1500 per month.

Out of interest, I wonder if there has ever been a ten year period (actual data not predicted falls) where it would have made sense to rent and not buy?

[Lepista]

long term it's better to buy.

short term, it's better to rent.

why?

long term, as pointed out previously the amount you pay per month in interest drops off, and the capital payments take over. This also means the deeper and deeper you get into your mortgage term the less effect interest rate changes have on you. Plus interest rates can go down as well as up. Sure they'll go up from their present standing eventually. But there's also a chance they'll go down again afterwards. Your rental will go up and up as inflation only ever pushes in one direction, deflation is still a theoretical device in this country. In short, I'm paying 800 a month in a mortgage, if interest rates ****** me up I may have to pay 1000, 1200 on average long term. But in 20 years time your 800 rental will be 1750, assuming 4% inflation a year, and in the end I own a house.

However short term, if you're only planning on staying somewhere for 2/3 years it's probably not worth the arseache of buying, and it's not financially brilliant either

http://www.drcalculator.com/mortgage/uk/

This is a good page for calculating mortgages ^^^

Yes, you're right, of course. However, the proviso is that in a declining housing market rents might also actually fall (as they are at present). With the numbers I've included in the sheet (post #17), the payback time is 17 years. that screams to me that, even if you are wanting to buy long term, now is not the best time to do so.

What you are also saying is that you will own an asset at the end of the term. My counter to that would be to look at the savings the renter has made, that is an asset too (as long as the money is invested and not spent!)

Taking that into account, the break even point is close to 22 1/2 years...!

Of course, house prices might well have picked up again by then, however it still tells me now is not the time to buy.

[fadeaway]

I've made a similar spreadsheet for personal use.

It basically takes my current savings amount, plus earnings per year to simulate the next 15 years via 2 routes: purchasing now vs renting now and purchasing in 6 years time.

You can edit the rate of interest on my savings and the annual change of house prices, the amount of money I earn, the rent I pay etc.

It then calculates my expected cash + equity for a given year.

The rental route works out best even if interest gained on my savings/earnings is a pitiful +2% per year and house prices GROW by 5% per year.

Change those stats to +5% interest per year and -3% house prices per year and I'm wondering why bother buying at all.

In almost all cases any price rises were offset by the reduction in mortgage cost gained by the higher deposit as a result of interest aided savings over 5 years. Compounding works nicely.

The main factor however is how much money you save while renting compared to paying a mortgage + house repairs as this creates the cash that will grow and save you money via a lower mortgage in years to come.

The conclusion it gave me, for my situation, was to carry on renting and invest my savings. Even if interest rates remain pitiful and house prices rise for a while to come it still works out better, but if prices drop over the nxt few years then it'll save me hundreds of thousands in the long run via compounding interest on the money I saved.

If nothing else it tells me that by renting and saving the remaining cash each month, I could buy the house outright with no mortgage before it would have been paid off otherwise and have money left over for a holiday..

Edited April 21, 2010 by fadeaway

[Lepista]

I've made a similar spreadsheet for personal use.

It basically takes my current savings amount, plus earnings per year to simulate the next 15 years via 2 routes: purchasing now vs renting now and purchasing in 6 years time.

You can edit the rate of interest on my savings and the annual change of house prices, the amount of money I earn, the rent I pay etc.

It then calculates my expected cash + equity for a given year.

The rental route works out best even if interest gained on my savings/earnings is a pitiful +2% per year and house prices GROW by 5% per year.

Change those stats to +5% interest per year and -3% house prices per year and I'm wondering why bother buying at all.

In almost all cases any price rises were offset by the reduction in mortgage cost gained by the higher deposit as a result of interest aided savings over 5 years. Compounding works nicely.

The main factor however is how much money you save while renting compared to paying a mortgage + house repairs as this creates the cash that will grow and save you money via a lower mortgage in years to come.

The conclusion it gave me, for my situation, was to carry on renting and invest my savings. Even if interest rates remain pitiful and house prices rise for a while to come it still works out better, but if prices drop over the nxt few years then it'll save me hundreds of thousands in the long run via compounding interest on the money I saved.

If nothing else it tells me that by renting and saving the remaining cash each month, I could buy the house outright with no mortgage before it would have been paid off otherwise and have money left over for a holiday..

I'd be interested in seeing that spreadsheet, if you still have it...?

Sounds very good

[fadeaway]

It's in no state for anyone but me to understand the mess and chaos

but I'll see if I can fix it up one of these days

[kingsgate]

Yes, it's actually like owning any other "consumable".

You wouldn't expect (usually) to make money when owning or leasing a car... why do we have this insane logic that makes us believe that we should make money from housing??

Well, my BTLs are generating stupid amounts of dosh at the moment, even after keeping up with maintenance and ongoing improvements.....