A client asked me recently, “Is better right now to rent or to buy?”
That is a great question! And most rent versus buy calculators miss a the most important part of the calculation!
A rent versus buy calculator will look at how much you are paying in rent versus your costs of home ownership. Assuming your rent costs are lower (if they are higher just buy!) and that you save the difference. It compares the value of the savings, at an average market return, versus how much your home equity is worth, also at an average market return, over a certain time period. Then you can decide say in the next 5 years are you better off to rent or to buy.
The problem with this calculation is that uses it average returns for your savings and real estate. The problem is that the future is unknown and there are thousands of different possibilities: the stock market could go up and the real estate market could go down, the stock market could go down and the real estate market could go up, they could both go up, or they could both go down. All at very different returns!
Wouldn’t it be nice if we could see what all the potential scenarios are, and where we stand vis-à-vis renting or buying for all of them? Luckily there is such a model called Monte Carlo Analysis where you can model all the potential scenarios and possibilities!
I used this analysis when I was first looking at getting into the real estate market because I’m an engineer and a bit of a math nerd, and we do those kinds of things. At the time my rent was significantly cheaper then then what I would be paying monthly to buy a condo and what the model told me was very interesting!
In 45% of all possibilities I was better off renting, but only by a few thousand dollars. And 55% of time I was better off owning, and I was better by hundreds of thousands of dollars! So, while a traditional rent versus buy calculation would tell me that it’s very close so I don’t have to rush into buying. The Monte Carlo model told me that yes you are only better off a little over 50% of the time buying, but you are better off by a lot! And when you are better off renting its only by a little bit.
Of course, I decided to get into the real estate market, and I made a 700% return over five-years on my initial investment. So, if you are wondering if you should rent or buy you need to know how far it could swing either way. If there is limited downside and huge upside, then buying probably makes more sense.
I hope that helps! If you have any questions or would like help with this analysis, please let me know!