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Selling vs. renting: Try this calculator

Posted Dec 07 2007, 10:12 AM by Karen Datko
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Millionaire Mommy Next Door is the queen of the online calculators this week, presenting a substantial list to help you get a grip on your debt situation and your possible options. It includes several here at MSN Money, including the debt evaluation calculator and the Savvy Spending Quiz. Another interesting calculator can be found at another MMND post, and it's right up Mommy's alley. It indicates whether you'd be better off renting out your house or selling it if you had to move. (If you're a regular MMND reader, you know she's no fan of home ownership, is a millionaire and doesn't owe anyone a dime.)

Mommy used the calculator on the home she and her family rent. "Interestingly, but not surprising to me," she writes, "the results indicate that my current landlord would probably be better off selling our rental home and investing in long-term Treasuries instead." That's the end result whether she uses the $300,000 value of the house when he bought it in 2006, or the $225,000 it's probably worth now. "When I use $225,000 in the calculations, the capitalization rate is 3.5% -- still considerably less than the (about) 5.7% rate of return on long-term Treasuries," she writes.

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Comments

 

Thank you for the links! I am a bit of an online calculator diva. I make my best financial decisions after comparing all of the options.

Just to clarify a bit, I'm not a fan of home ownership when the real estate fundamentals are so out of whack (rents compared to home prices). If and when the two come closer together, ownership may compare favorably. As you know, economists are pointing out that the recent RE bubble was historically unprecedented. Buying an investment that is falling in value doesn't make $ense.

Millionaire Mommy Next Door (Posted 12.07.07 11:45 AM)

First of all not all areas are falling in price.We just sold our home after 7 years netting( after realator fees) $270,000. We purchased another home in the same zip for 1.2 million, after 18 months it has been appraised at 1.5. We write off the interest we are paying, and when we sell, the first $500,000( per couple is not taxable)This women sounds ignorant.

Shana (Posted 12.08.07 8:44 AM)

Shana, thanks for your input.  Are you speaking of U.S. tax laws?

Brenda (Posted 12.09.07 9:27 AM)

(I posted my response earlier but haven't seen it here. Perhaps the links I included for illustration booted it out of the system... I'm reposting without the article links - Sorry if this is a repeat.)

Shana, It appears that you've forgotten to include a few things in your analysis: maintenance costs, homeowner insurance, mortgage interest payments, real estate sales commissions, and most importantly – the lost opportunity cost incurred by having so much money tied up in the sticks and bricks over your head. $1.5 million earning 10% in equities would return $150,000 the first year alone.

You are correct about the $500k cap. gains exemption for a couple selling a home, but you need to stay 2 yrs minimum. Alternatively, if your money is invested within certain IRA accounts, you won't pay taxes on 100% of your capital gains.

Over the long haul, house values are actually constant when adjusted for inflation. Equities, on the other hand, historically earn 6-7% more than inflation. Warren Buffett and Charles Schwab have both pointed out that houses don't increase in intrinsic value. Unless there's a bubble, house prices simply reflect current salaries and interest rates. Don't believe me that prices are falling? The news is full of reports. Here are a few you may want to check out:

(links removed this time)

Millionaire Mommy Next Door (Posted 12.09.07 1:38 PM)

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