Owning and Renting

Letter from Bill Wahl

Colorado Central – July 2008 – Colorado Central Magazine

Dear Ed & Martha;

Let me caution you not to have John Mattingly do your taxes. In his article, “A Farmer Far Afield” in the May issue, he makes a mathematical case for renting being more cost-effective than owning a home. I found a few problems with his analysis.

First, he makes the case that buying a home for $127K is likely to lead to a home valued at approximately $166K after 20 years. I have never seen this low a rate of return in any of the areas I have lived in around the United States. Generally, at least 4% increase in value per year has been much more likely (no guarantees for the future, of course). This would translate to an increase over 20 years to a value of approximately $250K. I would also estimate taxes, insurance and repairs at about $3K per year, versus his $2K figure.

But that is minor. The point is that after 20 years, if the homeowner put $20K down and had been paying a mortgage payment of about $750 per month plus $250 per month taxes, insurance and repairs, he would have paid $12000 per year or $240K over the 20-year period plus his original $20K.

If he sold and paid a realty fee of 8% or $20K plus perhaps another $4K closing costs, he would be out of pocket $44K for his 20 years. Did he make anything? He would have walked away from his house with perhaps $175K in equity/cash. But he also paid the cost of living in that house.

Now if you look at the case for paying rent for 20 years at a monthly fee of approximately $900 for the same house, this would mean a yearly cost of about $10,800. After 20 years, he would have paid approximately $216K (this makes the unlikely assumption that his rent did not increase during this 20-year period). This $216K compares to the $260K the homeowner would have paid. If the renter invested the difference of approximately $100 per month along with a $20K beginning sum equivalent to what the homeowner had to put down, he would have invested about $1200 per year. At perhaps 4-5% compound interest, this would produce a final amount of approximately $95K. This does not add up to the $447K which Mr. Mattingly calculated ($447K would have required an initial investment of about $127K, the whole price of the house, at 4 to 5% annual compound interest). Did he make anything? His overall cost was $216K but he realized savings through his investment of $95K, so in the end, he had to pay about $121K to live for those 20 years as a renter.

Thus an accurate comparison of owning versus renting; I think that you don’t make money either way. At the end of the 20 years, the owner paid $44K and the renter paid $121K. The owner walked away with $175K and the renter left with $95K. Draw your own conclusions.

Yours truly,

Bill Wahl