Renting vs Owning 

Running the Numbers






If your finances and credit enable you to buy a home, you really should buy one.  TODAY! 

Talk to your lender today - there is no benefit in waiting.

If I had a dollar for every time I've said that (and written it)......

I've been recording Indiana (Jackson County specifically) property data since 1995; and quit in Spring 2021 because I moved to a different state.  I see homes come into, then out of the MLS when they sell.  My database calculates appreciation rates by looking at current sales dates and prices and comparing against previous data.  I pay attention to this information.  I freely admit to being a database geek. 

So what, you might wonder?  Let's look at home ownership over time. 

Let me explain.

Suppose someone bought a house and paid $154000 for it in June 2017, and they sell it in February 2020 for $182000.  On it's face, it would seem the Seller held the home for 32 months (rounded) and stands to gain $28000; which is $875 for every month they owned it.  Additionally, the change in price and change in time results in an annualized appreciation rate of 6.46% per year.  Not bad. 

Now suppose that over the timeframe they owned it, they paid taxes and insurance monthly (T&I); and for the sake of illustration, let's assume that taxes and insurance total $112 per month. 

(Revision One: Original gain minus T&I:  $875 - 112 = 763)

Also suppose that when they bought the home, they financed 100% of the purchase price with a 30-yr fixed rate mortgage with a 5% interest rate.  The $154000 purchase price would have a monthly principal and interest (P&I) payment of $827 per month. 

 (Revision Two: Revision One total less P&I:  $763 - 827 = -64)

Total monies paid by Seller would be PITI, which is $827+112=$939 per month. 

Suppose the Seller agrees to pay a 6% commission to their REALTOR to sell the home (keeping in mind that real estate commissions are always negotiable).  The commission expense is $182,000*0.6=10920.  If you divide the commission by the number of months you held the property, the commission expense per month would be 10920/32=$341 per month. 

(Revision Three:  Revision Two less monthly commission expense:  -64 - 341 = -405)

So, if the Seller is paying PITI = 939 and you include the monthly commission expense; PITI+Comm = 939+341=$1280 per month.

Going back to the buy/sell data where I indicate the Seller got $875 per month for every month they held the home; when you compare the $1280 vs $875 you get the "REAL" expense paid by the Seller to live in that home for 32 months.  The "REAL" out-of-pocket monthly expense is $1280 - 875 = $405.00

Just over $400 per month, to live in a nice brick home with a February sale price of $182,000.

Do you think you could rent a $182000 home for $400 per month?  Of course not!

You might, if very lucky, rent a similar home for $1000 per month minimum; and that's if you are lucky. So if you will pay $1000 a month to your landlord, you would have nothing, repeat NOTHING, to show for it.  Over the 32 month period, you would pay your landlord $32000.

But if you are a BUYER and not a renter; over the same period you would have spent $405*32=$12960 for a roof over your head.  By being a Buyer and not a renter, you would save yourself $595*32=19040 over these 32 months.  

Remember, no one can live anywhere for free; unless you are "lucky enough" to live in the basement at Mom's house. The goal is to be smart about how you manage your payments. 

OR - STATED ANOTHER WAY (Using handy-dandy Excel spreadsheet):

Monthly Rent Option $/mo 1000 Given
Price Paid Before     154,000 Given
Purchase Date 6/16/2017 Given
100% Financing: Rate 5.00% Given
100% Financing: Years              30 Given
Monthly P & I Pmt       826.71 Calculated
Annual Tax + Ins Est  (T&I)    1,344.00 Given
Monthly T&I Pmt       112.00 Calculated
Total PITI       938.71 Calculated
Sale Price 182000 Given
Sale Date 2/1/2020 Given
Holding Period (months)         32.00 Calculated
Realtor Commission % 6.00% Given
Realtor Commission $ 10920 Calculated
Appreciation Rate/Yr 6.465% Calculated
Gain on Sale
Purchase Price     154,000 Calculated
Sale Price     182,000 Calculated
Sale - Purchase       28,000 Calculated
Less Commissions       10,920 Calculated
Net Gain       17,080 Calculated
Net Gain       17,080 Calculated
Divided by Holding Months         32.00 Calculated
Net Gain per month 533.75 Calculated
Over the Holding Period: An Owner A Renter
PITI = Total per Month Paid            939         1,000
Holding Period Months              32             32
PITI x Months       30,039       32,000
Less Net Gain       17,080              -  
Real Cost of Housing       12,959       32,000
Cost of Housing / 32 Months            405         1,000
Chg in Costs/Mo vs. Renting            595  
Cumulative Change in Cost of Housing for 32 Months 19041  
TODAY at the Closing:    
Sale Price of Home     182,000  
Less REALTOR Commission       10,920  
Less any other Seller Expenses?              -    
Less Outstanding Mortgage     147,680  
Equals Proceeds from Sale       23,400  

The Proceeds from Sale might make a nice down payment on your next home.  This is how home ownership builds wealth; and illustrates how renting does the opposite.  

And in case you are curious, there is a point where a person would be indifferent between owning and renting, based upon the Sale Price.  If all of the "Given" data stays the same, and the Sale Price only changed from 182000 to 161750 would make the Cost of Housing Per month equal to the monthly rent amount given.  Furthermore, if the Sale Price did change to 161750; this would yield an appreciation rate of 1.858% per year over the holding months. 

I am examining a method to legitimately answer questions regarding appreciation rates. I am studying the relationships between changes in time of ownership vs changes in prices. Problems arise when one examines a single home, or the street the home is on, or the subdivision the home is in, or it's Township or it's county.  

This analysis is far more challenging that it seems; primarily due to lack of historic sales data that is reliable.  There are also many adverse factors to consider, such as whether the home was sold by an owner, estate,  investor, sheriff, or bank; because each owner type has objectives that may cause prices and thereby appreciation rates  to swing tremendously.  

Don't read too much into "Appreciation Rate" claims; for the very reasons cited above.   If you ever hear another REALTOR claim anything pertaining to appreciation rates, ask them how they figured it out. They may have a "gut feeling" and a pretty accurate one; however, that is no substitute for good ole math!  

Let me illustrate.  Suppose exactly 3 years ago you deposited 100000 into your bank and they offered you 2% per year interest.  At the end of Year One, your balance would be equal to 100000 x 1.02 = 102000.  Next, at the end of Year Two, your balance grows to 102000 x 1.02 = 104040.  At the end of Year Three, your balance would be 104040 x 1.02 = 106121.  By comparing your original $100000 initial deposit to the ending balance of 106121; over 3 years you will have earned 2% per year on your money.  Your money appreciated 2% per year.  Very straightforward.  (Spreadsheet:  PV=100000; FV=106121, N=3; solve for RATE; Rate equals Appreciation Rate)

Case-Schiller Index is often cited by real estate talking heads.  It's a great analysis tool; if you happen to live in a market the index actually targets.  The talking heads will use this index as an appreciation tool, but it's real value to the rest of America is next to nothing.  CSI tries to do in the metro areas what I've done in the rural area of Jackson County Indiana.  (Use the link, go to "History and Methodology".)  Ask yourself, if the CSI examined price trends in Indianapolis, or Gary/Chicago, or Louisville, or Cincinnati; would those price trends really fit in rural Indiana?  Absolutely not.  The CSI is quoted often when the heads try to extrapolate a small region trend and apply it broadly to the country; apparently with no one questioning how "real" or relevant the CSI information is.

Sadly, some REALTORS use the CSI as their basis for appreciation growth with little or no regard to how accurate the estimate is.  They just quote it, and feel like an "expert" when they do.  I am just not that kind of REALTOR.  

Now, if a REALTOR tells you that homes have appreciated by 2% (or any percent for that matter) per year, and you are discussing a home worth 106121, it implies some prior value to compare past price vs current price in order to develop the appreciation rate.  If there is unreliable or absent data for prior information, there is not enough data to determine an appreciation rate.  With no reliable value for PV, you cannot calculate the RATE even if you have the N and FV data - it just does not work that way. This equation is "one way" in that you must have a historic price, a price today, and a change in time to determine Appreciation Rates.  

We walked thru the bank account example knowing what we started with, what we ended with, and how long it took to get there.  You cannot have a price today, an imaginary "Appreciation Rate" then back-date a historic sale date and prior price calculated on the premise that the appreciation rate is accurate.   This is why price history data is vitally important.  I've had REALTORS tell me that "prior sales data is not important, only market pricing" and there is some wisdom in those words.  Market pricing is based on what the market will bear - or more accurately what the Buyer is willing to pay; because Sellers can sit on overpriced homes until they turn blue and never end up selling them.  

If you are a Buyer, and I hope you are, knowing the appreciation rate being asked for by the Seller might be a useful thing to know.  If a Seller is looking for 3 percent; are they being reasonable?  What if they are seeking 13 percent, or 15, or 25+?  How would you know if you have no basis for comparison?  Maybe even 2 percent is reasonable if the home needs updating and hasn't sold for 20+ years.  Or maybe 25 percent is reasonable if the Seller is an investor who accomplishes a complete top-to-bottom remodel/renovation done recently and looks brand new.  Perhaps. 

This is why whenever anyone asks me "How's the market doing" I can only honestly reply "it depends on how you want to look at it" and go from there.   

There are many assumptions in this illustration, but I believe them to be reasonable and realistic.  There may be modest rounding error too. 

Hope this helps!

Steve Freeman, Broker/Owner

teaser:  Next topic for another day:  Let's all panic when interest rates go up 0.25%   -hint, it is NOT the end of the world!!

CountyRealty Running The Numbers (Last revised/reviewed Feb 2020)

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