Rent scenario
Assets: Downpayment * 5.5% annual return (in a long-term CD or a bond)
for X number of years
Liabilities: Rent (with 3% annual inflation) for X number of years,
renter's insurance for X number of years
Buy scenario
Assets: Principal payments you make on your house for X number of
years, according to your amortization sheets, tax savings over and
above what you could claim without the house (not always the entire
deductible amount, depending on your situation)
Liabilities: All mortgage interest you will be paying, all real estate
taxes, all repairs and improvements you will be making, all condo fees
you will be paying, all homeowner's insurance fees you will be paying,
all PMI you will be paying if you put less than 20% down.
Example
Let's say you have $60,000 for a down payment, pay $1,200/month rent,
and $100/year renter's insurance.
At the end of five years, you have $78,417 in assets (a profit of
$18,417). You've spent $76,951 on rent and insurance.
You're thinking of buying a $250,000 house (good for you; you've found
a deal!). You put $50,000 down to avoid PMI, pay $5,000 in transfer
tax, $1,000 in miscellaneous fees, and escrow a good portion of the
remaining $4,000 with the mortgage company for tax and insurance.
Your annual tax bill is $2000/year (low), and your annual insurance
fee is $1000/year (average). We'll assume those don't change (big
assumption).
Assuming a 30 year fixed loan at 6.5%, you've paid off $13,028 at the
end of that five years.
But you've also paid $64,084 in interest and $10,000 in taxes, and
$5,000 in insurance. Let's say that all of the interest and RE taxes
are deductible in the 28% tax bracket, which brings you to a total
adjusted housing payment of $58,340. This is also assuming you haven't
had to do any maintenance or repairs whatsoever to your house (ha
ha!).
So, at the end of five years, you need to "beat" $18,417 minus $76,951
for a net "housing payment" of $58,534, which is what would happen if
you rented.
.92X (net selling price) - $186,972 (what's left on your mortgage) -
$58,340 (interest, taxes, and insurance accounting for tax savings) -
$6,000 (initial closing costs) must be > = $58,534 for you to break
even.
End result: $336,789 is your magic number, and 6.14% is the average
annual rate of house appreciation you'd need.
