Using a Rent vs Buy Calculators in 2018
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This is basically a post asking how to interpret the rent vs buy calculators with the new tax law (I’m assuming all these online calculators were made before the law). The calculator I’m using now is the NYTimes one: https://www.nytimes.com/interactive/2014/upshot/buyrentcalculator.html
In the past, the calculator seemed to indicate that a 30 year mortgage with as low of a down payment as possible was the way to go, presumably due to tax deductions on mortgage interest and being able to keep the down payment money in stocks.
However, with the new tax laws I’m guessing the calculations will come out different: Our state income tax rate is relatively low but we pay about $20K per year in state tax. With the new law I believe we can only deduct $10K of that. So I think we won’t save anything on property tax if we buy a house. We would also need an additional 14K of deductions before it would be worth it to itemize. And if we buy a house of about $450K or less and have 1 kid I’m not sure we’d be passing that $24K mark by much, if at all.
Does anyone know of an updated rent vs buy calculator? And if you were to use the NYTimes one would you check change the “Marginal Tax Rate” to zero given that it seems like we might be going with a standard deduction even if we buy a house?
If you had over twice the amount of a house saved what percent down payment would you put down to buy the house knowing that that money is money you would no longer be able to invest in taxable account index funds?
Also, how did you all find the best mortgage rate? Did you go through a mortgage broker or just go from bank to bank?
I know it’s a lot of questions, so thanks in advance!
I would probably build one on excel or google spreadsheet. So much of the info is unique to you and your situation that this will probably give you the best result.
As far as how much to put down, that’s down to your gut, comfort level. Like you said, the tax benefit is vanishing for many. If you can borrow at ~4% I could see borrowing more, but once rates climb much further IMO it may not be worth carrying the debt.
Mortgage rate wise, definitely shop it around, at least 3 lenders. I recently shopped rates and Jonathan Brozek at US Bank was the best for physician loans. I think there is a WCI article on physician lenders, if you go that route.
LEVEL 1 WCI FORUM MEMBER.
This is basically a post asking how to interpret the rent vs buy calculators with the new tax law (I’m assuming all these online calculators were made before the law). The calculator I’m using now is the NYTimes one: https://www.nytimes.com/interactive/2014/upshot/buyrentcalculator.html
In the past, the calculator seemed to indicate that a 30 year mortgage with as low of a down payment as possible was the way to go, presumably due to tax deductions on mortgage interest and being able to keep the down payment money in stocks.
However, with the new tax laws I’m guessing the calculations will come out different: Our state income tax rate is relatively low but we pay about $20K per year in state tax. With the new law I believe we can only deduct $10K of that. So I think we won’t save anything on property tax if we buy a house. We would also need an additional 14K of deductions before it would be worth it to itemize. And if we buy a house of about $450K or less and have 1 kid I’m not sure we’d be passing that $24K mark by much, if at all.
Does anyone know of an updated rent vs buy calculator? And if you were to use the NYTimes one would you check change the “Marginal Tax Rate” to zero given that it seems like we might be going with a standard deduction even if we buy a house?
If you had over twice the amount of a house saved what percent down payment would you put down to buy the house knowing that that money is money you would no longer be able to invest in taxable account index funds?
Also, how did you all find the best mortgage rate? Did you go through a mortgage broker or just go from bank to bank?
I know it’s a lot of questions, so thanks in advance!
Click to expand…I did a spreadsheet for this. Adjust the Yellow boxes on the left – the top green box will make it simple and tell you what holding duration makes buying a superior decision. Keep in mind this makes some assumptions, like when you get the benefit of the mortgage interest deduction (I assumed 12 months from start date since it’s reconciled at tax time typically), and that you aren’t going to take out a loan higher than $750k, which is where the cap kicks in. It also only allows for single or MFJ filing, but this is more to populate the standard deduction. It also assumes the realtor fees reduce equity but doesn’t otherwise calculate posttax wealth because these tax rates are so variable depending on your personal situation. Hope it helps.
Attachments:
You must be logged in to view attached files.Kind of surprised they haven’t updated the calculator, I think that’s one of their most popular pages overall.
That’s a pretty awesome spreadsheet ENT doc, thanks!
This is a very helpful spreadsheet, thank you! I have a few questions….
1. $200/month CAPEX – is this money set aside for potential home maintenance/renovations?
2. What is column Y – FV CFs?
Thank you in advance!
This is a very helpful spreadsheet, thank you! I have a few questions….
1. $200/month CAPEX – is this money set aside for potential home maintenance/renovations?
2. What is column Y – FV CFs?
Thank you in advance!
Click to expand…Yes, the $200/mo CAPEX is money set aside into a reserve account for future capital expenditures. There are suggestions out there as to what to set aside, but this will vary depending on your location, age of the home, age of appliances, etc. Helps to know the lifespan of all your stuff. Again, this is why the block is yellow/modifiable. The white blocks on the left as well as all the columns of info are derivatives of the yellow block inputs.
As for the column Y information, unless the rental and purchasing costs per month are exactly the same there will a cash flow to one side or the other – buying or renting. It’s important to understand columns VZ for this. V looks at things from the perspective of purchasing (hence the blue color). The only wealth you have at the end of the purchase is the equity net of realtor expenses. The other columns, WY, look at things from the rental perspective (hence their being colored orange). The difference between the two (column Z) reflects the value of the purchase decision (as opposed to rent) for every given period. The AA column simply puts things in terms that are easy to understand and helps to generate the B3 sell that tells you at what point buying is superior. Back to your question. The down payment is cash that you would have otherwise to invest, thus from the perspective of rental it is a benefit. That cash is assumed to be “put to work” in an investment with a specific cost of capital (block B37). This is essentially what return you think you are going to get on the cash that you invest on an annualized basis. All cash flows and dollars here are compounded at a monthly rate because we’re evaluating monthly periods and cash flows, which is why this APY needs to be converted into a monthly rate based on APR (APR/12). We think about investments as things that compound at some annual rate – 6%, 5%, whatever. But this is an APY – annual percentage yield. And since these cash flows are occurring monthly things need to be put into a monthly compounding rate, hence the APY to monthly rate conversion. Sorry for all that – take a look at APY to APR formulas and examples on the internet to see what I’m talking about if you’re still confused. In the base scenario I uploaded the differential cash flow is positive to the rental side of things. This may not always be the case, but the spreadsheet takes account of that. Just as the down payment is compounding at a monthly rate, so too do the cash flows that you have in your pocket as a result of renting. Take X4 for example – you are $269.21 more cash positive in that given month for having rented than for having bought. You have this available to invest, and so you invest it at a given APY that you input already, but you are doing this monthly so it will compound at a monthly rate (APR/12). The FV CF (future value of cash flows) in column Y is simply an accumulation of all of those cash flows in future value terms. For example, you had $269.21 in the first month, which you invested and which compounded for 1 month at your APR/12 rate. You then had an additional cash flow in month 2 of $269.21. So your total wealth from cash flow generation is the $269.21 compounded over 1 month plus the new $269.21 which hasn’t had an opportunity to compound yet. The combined total with no compounding would be $538.42 but with the first cash flow compounding (growing in the market) your total wealth is actually $539.74. This can be seen from the input formula in Y5, for example “=(Y4*(1+$B$38/12))+X5”. The “Y4*(1+$B$38/12) part is simply the first cash flow compounding for a period, where the X5 term is the new cash flow that you’ve added. Due to tax benefits there will be periods where the cash flow from the rental perspective is negative (buying was superior that month because you got your yearly tax benefit from interest deduction). But the formulas and net values in column Z account for this. Similarly, you may have a situation where buying was a positive cash flow. You’ll have a bunch of negative numbers for cash flow in column X, because from the perspective of renting it is a negative situation. You need to maintain that perspective regardless of what the numbers look like in the columns, because it’s the net difference that matters.
Sorry for the super long winded explanation. I hope it helps.