Rent vs Owning Your Home: Opportunity Cost and Running Some Numbers

Intro by JL’s Team

If you’re wondering if renting vs owning your house is a better choice for financial independence, you’re not alone. A lot of people struggle with this choice. With current interest rates on a 30-year fixed mortgage hovering between 6–7%, it’s more critical than ever to do the math. 

In this post, JL breaks down the expenses of owning vs renting, opportunity costs, and gives a few frameworks you can use to plug in your own numbers. 


The saga of trying to sell our house in this unfavorable market continues. We have just lowered our price yet again. If it sells, I have a great degree of confidence we will have sold at the absolute bottom. We’d be thrilled with that. To see why, let’s play with some numbers.

Number blocks

Is my bias showing?

Rent v. Own But before we begin, we need clear the air on a few things. Owning a home is almost always a lousy investment. Relax. This doesn’t mean you should never own one.

It does mean you ought to be clear on your reasons and not let yourself be suckered into a false reality. It means you might want to run the numbers.

Some people love the sense of ownership and enjoy working on their property. Neither apply to us, but maybe that’s you. That’s fine. We can understand.

We’ve owned a couple ourselves over the years. Sometimes for schools and an environment for raising our daughter. Sometimes just because we liked the house. But never thinking we were making an investment, let alone a good one. That’s folly.

Other times we’ve rented and enjoyed the freedom and flexibly that lifestyle offers. Sometimes we’ve been both landlord and tenant at the same time, arguably the best of both worlds.

Now renting is the direction to which we are ready to return. But we’ve never made these choices without first considering the costs. You might want to do the same. Using our numbers, here’s how….

The apartment we’ve targeted will cost us about $2000 per month, $24,000 per year.* Built into that are a few extra expenses we’ll pick up not owning. Winter storage for my motorcycle and summer storage for the car’s snow tires, for example.

Our house is on the market for $355,000 and after commissions and fees we’ll net around $330,000. (This is lesson #1. Buying and selling houses is expensive. Unless you are sure you are ready to settle in for a number of years, rent. End of story.) We are mortgage free.

Burning money

Opportunity Cost

With $330,000 equity tied up in the house the first and largest expense to consider is “opportunity cost.” That is, simply, what could this money be earning elsewhere? Right now it is locked up in the house and earning zero interest or dividends.

Here we need to select a proxy. In your own analysis, you might use whatever you plan to invest in. Or, if you are renting and considering a purchase, whatever you currently have your soon-to-be tied-up-in-the-house money invested in.

I choose VGSLX, which is the Vanguard REIT Index Fund, because I intend to move the money here  to maintain my asset allocation in real estate once the house is sold. Since VGSLX pays a dividend of about 3.5% the opportunity cost is $11,555 (330k x 3.5%). That is, VGSLX would pay me $11,555 per year while the house pays nothing.


Capital Gains

Of course, the house might rise in value providing me with capital gains. But VGSLX has this same potential. In actual point of fact, the fund is the more conservative investment. Here’s why:

VGSLX is a broad based fund holding investments in numerous properties all across the country. The house is a far more focused holding: one property in one neighborhood in one town in one state. As such it could provide greater or lesser gains.

During 2011 VGSLX rose about 12% while my house value continued to slide. 2012? Who knows? Maybe the house will outperform.

Since this is unknowable, as predicting the future always is, and since the investments are both real estate, we can for this analysis treat the potential as equal. Clearly if you strongly believe your house or the alternative investment will do better you can factor this into your thinking.

Running the Numbers

$11,555 opportunity cost. This is the 3.5% dividend our 330k could be earning in VGSLX.

$18,000 in cash expenses comes from these:

  • $2500 heating oil. Heat is included in the apartment rent.
  • $7000 maintenance & repair & insurance (an average based on our actual records)
  • $8500 real estate taxes

$29,555 total annual cost of owning and operating the home. Pretty shocking, no?

v. $24,000 rent =

$5,555 annual premium to live in the house.

Now looking closely you’ll notice, while the apartment saves us $5,555 per year, there is an $6,000 cash flow advantage to owning the house. It takes 24k in cash outlay to rent the apartment but only 18k cash to operate the house.

This is similar to the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) for a business. Cash flow is critical in running a business or your household. But the ITD&A are all real costs that you need to consider in an accurate fiscal evaluation. So is opportunity cost.

Overall costs trump cash flow costs, simply because they are more complete.

There you have it, the most fiscally precise way to compare the real money costs.  Just plug in your own numbers.

Running numbers

Running the Numbers another way

But wait, some will say, owning the house saves you $24,000 in rent. Isn’t that like an investment return? This is a bit clumsier, but sure, we can approach it from this direction.

It looks like this: $24,000 rental savings (investment return) owning the house, minus:

  • $2500 heating oil
  • $7000 maintenance & repair & insurance
  • $8500 taxes

$18,000 total cash expenses =

$6000 positive cash flow in house, minus

$11,555 opportunity cost =

-$5,555 annual investment deficit, i.e. cost of house over renting.

Cash flow cost also remains the same.

Money in a jar

What about mortgage interest payments?

If you have a mortgage, and many do, you simply need to add an extra couple of numbers to the formula. Let’s take a look.

Suppose I had 20% equity ($66,000) in the house and an 80% mortgage of $264,000.

$2310 opportunity cost. This is the 3.5% dividend our $66k could be earning in VGSLX.

$23,795 in cash expenses comes from these:

  • $2500 heating oil. Heat is included in the apartment rent.
  • $7000 maintenance & repair & insurance
  • $8500 real estate taxes
  • $10,560 estimated interest on our mortgage loan @ 4% (note: the portion of your months payment that is applied to principle should not be included for this purpose although you will want to add it to calculate your cash flow number)
  • -$4765 tax deduction savings. This assumes a 25% tax bracket and includes the real estate tax and mortgage interest above.

$26,105 total annual cost of owning and operating the home.

v. $24,000 rent =

$2105 annual premium to live in the house.

Because you have a mortgage your cash flow cost is now up to $23,795.


Bottom line.

So, even selling at the market bottom I come out ahead. I can handle the higher cash flow and that $5,555 in annual savings is real money in my pocket. Plus I get to step into the blissful renter’s life again.

BTW, while owning your own house is a lousy investment, investing in rental houses can be a whole other and very profitable thing. As alluded to above, at one time many years ago I was both a renter and a landlord at the same time.

These days investment real estate is too much like work for my tastes. But there is money to be made if you are willing to make the effort.


Post Script:

In the rent v. own analysis there are several formulas that provide some rough guidelines as to which is fiscally better. Here are two:

1.  House price/Annual rent.

If the result is 21+ renting is better

Between 16-20 it’s a toss-up

less than 16 is a vote to buy

Using our number:  $330,000/$24,000 = 13.75  This says we should buy, or in our case stay put.

2.  Monthly rent x 110 = house price.

If the house costs more, rent. If less, buy.

$2000 x 110 = $220,000. This one says no question, rent.

So maybe these are not much help.

More useful, I think, is to look at actual numbers for a given situation as we did above.


“Life choices are not always about the money,

but you should always be clear about the money choice you are making.”


Addendum I:

Rent v. Own in Ecuador

Addendum II:

The Mad Fientist has a great post on his planned path to wealth. In it he has a compelling assessment of how renting will help smooth the way:

Addendum III:  

Here’s a real estate investor’s take: Renting is throwing money away…Right?

Addendum IV:

Podcast —Why your house is a terrible investment

Addendum V:

*Turns out I vastly over estimated the cost of our apartment. Rather than $2000/$24,000 per month/year, the number I used in the post scenarios, the actual rent is $1415 per month, $16,980 for the year. Since these numbers are only used as an example to illustrate the concepts, I don’t feel the need to recalculate them in the post. It is the technique that matters and in applying it you’ll want to use your own numbers anyway.

Addendum VI: 

Thanks to Val in the comments below for this excellent video on the pros and cons of both renting and owning.

Addendum VII: Apples and Oranges

Some have observed that my examples above are not an Apples v. Apples comparison. Indeed they are not. But this only becomes an issue if you are looking at it as an academic exercise designed to prove a “winner” in comparing renting v. owning. I don’t.

In my opinion it is far more useful to compare two actual choices someone might be considering, and the framework I’ve provided here is designed to do just that. I’ve simply used our situation as the example.

You might be currently living in an apartment and considering buying a house. Or, like us, you might own a house and be considering renting again. Running your own number comparison will tell you what each option you are considering will really cost. You can even compare houses at different price points.

People make choices in the real world and running the numbers in the fashion I’ve offered lets them see precisely the financial implications of their choices. If they care to.

Having said that, should you be interested in what the numbers look like if we compare owning v. renting my specific house, check out my February 26, 2012 conversation with Executioner in the comments below.  In my reply I run those exact numbers and you can see the same framework used in a direct apple v. apple comparison, again using our house as the example. It works either way.

The point is not that you should rent. Or that you should own. The point is, it is worth understanding the financial ramifications of your choices. Doing so positions you to make a more informed decision.

Once you have a sound handle on the numbers, you are also in a better position to evaluate the various lifestyle issues, deciding what such things are worth to you.


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Important Resources

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  • Betterment is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
  • NewRetirement offers cool tools to help guide you in answering the question: Do I have enough money to retire? And getting started is free. Sign up and you will be offered two paths into their retirement planner. I was also on their podcast and you can check that out here:Video version, Podcast version.
  • Tuft & Needle (T&N) helps me sleep at night. They are a very cool company with a great product. Here’s my review of what we are currently sleeping on: Our Walnut Frame and Mint Mattress.


  1. DollarDisciple says

    Interesting analysis! I always roll my eyes (hopefully people can’t see me) whenever someone repeats the mantra “Your home is your biggest investment!” No.. investments make me richer! My house is just a place to live. Everyone needs somewhere to live and some people just prefer houses.

    The opportunity cost is an interesting angle and it changes the whole game. That’s actually one reason why we opted NOT to pay off our house and instead buy the rentals. Our mortgage is at 4.75% and our rental portfolio is yielding 24% (albeit, with some input of time on our part). The math was easy 🙂

      • Debbie says

        Boy……ur not kidding.
        OMG unless he is in a high rent district and has fantastic tenants and little maintenance and mortgage.

        One important issue I don’t see here, which is huge IMHO…..

        The stress has been OVERWHELMING
        Put a fork in me…I’m done
        Well at least slowly making my exit from Rentals.

    • Cameron says

      I’m not so sure about the numbers on this… even with opportunity cost factored in. Then again, I’m from Australia so the figures might be slightly different.

      In my home town (Brisbane), I can buy a house in a nice area outright with the $500,000 available to me, or I can pay $400 per week to rent it and invest the difference. (This is an actual example, not just a made up set of numbers)

      Assuming a “safe withdrawal rate of 4%” to prevent ever eroding the value of the $500k, if I were to choose the option to rent and invest the difference, I can only use a maximum of $20,000 (plus inflation) per year for rent. Which is pretty much exactly the same as the house costs to rent. The problem is the $20k I made through investing the difference is subject to tax and therefore I need an amount somewhat larger than $500k to be able to afford to rent the same place.

      For argument’s sake let’s say I need $600k… suddenly I forego the opportunity cost of an additional $100k to rent instead of buy.

      So it appears in my case it’s ended up being cheaper to buy the house, even accounting for the additional ongoing expenses (taxes, maintenance, etc.).

      I’m not familiar with the US real estate market, so it may make more sense to rent over there. But unless I’m missing something it makes less sense to rent in Australia, despite the apparently overvalued housing market.

      • laura1 says

        The American Dream of home “ownership” is actually a joke. The average American has 62% of their net worth tied up in their home, but how much INCOME does that investment earn? Nothing! or better yet, NEGATIVE nothing! Property tax, insurance, upkeep, HOA dues, etc. on a paid off home can take a HUGE bite out of your Social Security check!

        Me? I’m either going to purchase a home for cheap (all cash) during the next crash, or just keep saving my money and renting! As I save money on rent, my cell phone ($20/month from MetroPCS), my car insurance ($25/month from Insurance Panda), etc., I’ll be able to invest more into index funds with my freed up capital… something homeowners can NEVER do!

        • Cameron says

          Homeowners can certainly invest as well as own a home. I concede that some NEVER will, but this doesn’t mean they can’t.

          Owned homes don’t generate INCOME in the same way investments used to cover rental payments don’t generate INCOME.

          This is pretty much my point… whether your net worth is tied up in your home or whether its tied up in investments that provide you with INCOME to pay your rent, it’s exactly the same. Except where I’m from you don’t pay tax on interest saved whereas with interest earned, you do.

      • Aron says

        That is not how it works. Google the New York Times rent vs own calculator and plug in reasonable numbers to help you out. I rent a 700k place for 2350. My mortgage with hoa and taxes would be about 4300. This doesn’t even include all the maintenance and higher insurance costs and remodeling that I would do over a 30 year mortgage. If I rent and then invest that 2k difference over the course of the 30 years at 7%, I’d have 2.44 million stashed away due to my decision to rent.

        • Cameron says

          Except when you buy a house your payments are $4300 per month for 30 years. When you rent, your payments will go up over time. Unless you’re saying you plan to rent somewhere that costs $4300 for the next 30 years? And after that you’re going backwards.

          I recently bought a house for $680,000… interest rate is a tick over 4% and costs me under $3000 a month. Doesn’t matter which way I dice it, I can’t get the kind of savings renting you do.

  2. jlcollinsnh says

    I paid off our mortgage a few year back when rates were higher.

    However with rates at these exceptionally low levels, were I making the decision today, I’d keep the mortgage and leave the money invested in VTSAX for the higher long-term gains.

    For somebody running a real estate investing business like you DD the decision, is as you say, easy.

    Readers, to see DD’s wonderful analysis of leverage in investment RE, hit the link in my post above.

  3. Dividend Mantra says

    Timely post, as I’ve been going through this argument in my mind and on paper (as I do calculations).

    I’ve come to the overwhelming conclusion, that while buying will likely come out ahead monetarily for me if I stay in one place for 10+ years, However, I don’t really like the idea of being chained to a location (and house) for that long. 10 years is a long time in one person’s lifetime, as life is relatively short.

    I like the idea of one day living off my dividend income and perhaps traveling to low cost locales like Ecuador, Thailand, the Philippines and what not. Being tied down to a house in hopes it appreciates and sells so that I can go somewhere is uninteresting at best, and sickening at worst. And, even if I don’t travel and stay in the United States once you’re no longer tied to a specific geographical location through employment…then you’re really free to come and go as you please and that’s a freedom that I’m willing to pay a premium for through renting.

    There’s always the option of renting out a house, but who wants to worry about landlording when you’re off living a wonderfully exciting life somewhere 5,000 miles away?

    I don’t enjoy cutting the grass, painting walls, customizing a living room, landscaping, impressing neighbors, being tied down to one location, being tied down to an object or having most of my net worth tied up in one illiquid asset that is slowly falling apart.

    Great post!

    • jlcollinsnh says

      Hi DM….

      Wonderful comment, and I just read it out loud to my wife. We can relate, and you had us LOL with your last line. Amen!

      As you may know from my other posts we are in the process of trying to sell our house to return to the blissful, carefree, flexible and more profitable life of a renter.

      You’ve absolutely nailed all the downsides to homeownership. The only thing I’d question is your thought that you’d come out ahead with a house after ten years.

      Houses are terrible investments. Unless someone needs a forced savings plan thru lack of discipline. That’s certainly not you.

      I have a post under construction about this, but renting for the fiscally disciplined is always the more profitable choice.

      Your plan of living in various places around the world matches ours exactly. We spent last summer in Ecuador and highly recommend it. Wonderful place. This year we’ll be in Peru and Bolivia. My wife loves her job but working for the schools at least she has the summers off.

      Our daughter was in Thailand a couple of years ago and raves about it. Sounds a bit hot and humid for our tastes, but she had a great time and loved the people.

      As for the Philippines, the son of a pal of mine recently married a Philippine girl. They traveled there to meet her family and he’s been talking about moving there ever since.

      There are a lot of very cool places to visit in the world. Beats the hell out of mowing the grass.

  4. Trish Rempen says

    I’ve owned a lot of homes, starting with the cottage in Ireland on an acre – that cost me 2000 pounds.(US 4000.) With the romantic stream. (Of course, it had no plumbing, but hey-)
    Bought another farm in Ireland for 5000 pounds (US 10,000.) An acre, 2 storey – and plumbing! Coupla outbuildings and barns…and an acre of bog.
    Then there was the villa in Spain, gorgeous view of the Mediterranean, bought for $28,000. (Furnishings were an extra $3000.)
    These were pretty easy purchases. No mortgages. Few costs.
    Between now and then, I’ve sold or bought (I think) 18 properties. Still own 5 of them. Maybe 6.
    Still no mortgages.

    And yet – after all that – I agree with your post! With few exceptions, buying a house, unless you like houses and don’t need a mortgage – is a responsibility. I just understood real estate better than I understood funds. I never did the homework – or had your blog to read! If I had, I might not have bought the houses! (And yes, I do have the VTSAX now—)

    PS: Yes, the villa in Spain is sold. Sorry.

    • jlcollinsnh says

      As I recall, you’ve owned several rental houses and those can be very sound investments. Do you still have them?

      In some places around the world the numbers plugged into the formula could look very different.

      When we were in Cuenca, Ecuador last year we looked at some apartments. You can buy a beautiful 2-bed/2-bath place for 125K or rent one for $800 per month:

      $4375 opportunity cost. This is the 3.5% dividend our 125k could be earning in VGSLX.

      $1700 in cash expenses comes from these:

      n/a heating oil.
      $1200 condo fee for maintenance; repair; insurance; security
      $500 real estate taxes

      $6075 total annual cost of owning and operating the home.

      v. $9600 rent =

      $3525 annual premium to rent. So here buying makes more sense. I’ll bet the number on your places in Ireland and Spain would have equally favored buying.

      • Trish Rempen says

        Still have 3 rentals here in NM. But I wouldn’t have done it if there had been a mortgage involved. And yes, you’re right on the European ones…
        Of course, if you want to put in plumbing, it’s best to own the place.
        And the absence of plumbing didn’t deter the previous owners from raising 14 children in the house. We had different priorities.

          • Trish Rempen says

            Overall, good. I like the places, would live in any of them myself. I use an agency, so I don’t deal with too many of the issues, and I bought them all at a good price.
            The other houses? I live in one, and the other is a cabin in the Jemez mountains!

      • jlcollinsnh says

        an additional thought on this. In running these numbers you should demand buying be less expensive than renting to compensate for the additional risks of ownership.

  5. Executioner says

    Greetings from another NH resident.

    Just playing devil’s advocate here…how would the numbers look if you had done this comparison using the rental price for your house, instead of an apartment? How much would you charge someone to rent your current home from you?

    I wonder if running this comparison between a $330K home and an apartment might not be exactly apples-to-apples.

    It sounds to me like you’re gaining some of the “renting advantage” simply by downsizing. Couldn’t you gain a similar advantage by selling your large house and buying a smaller condo? I think you’d see extra cash flow in that scenario too, without bringing rent into the equation.

    • jlcollinsnh says

      Hi Ex, and welcome.

      You make an excellent point and, in fact, we can look at this with some precision. A few months back someone looked at the house and made an offer to rent it @ $2500 per month, 30k annual. This seems a fair rate and it does make your point that some of the benefit we’ll realize is from downsizing. Here are the numbers:

      $11,555 opportunity cost. This is the 3.5% dividend our 330k could be earning in VGSLX.

      $18,000 in cash expenses comes from these:

      $2500 heating oil. Heat is included in the apartment rent.
      $7000 maintenance & repair & insurance (an average based on our actual records)
      $8500 real estate taxes
      $29,555 total annual cost of owning and operating the home.

      v. $30,000 rent +
      $2500 heating oil. (In renting the house tenants would pay for heat) =

      $32,500 to rent the house
      – $29,555 to own it

      $2,945 annual premium to rent.

      Of course, we can also change other numbers too. For instance, we could invest our 330k in RAI which pays a 5.5% dividend. The numbers then:

      $18,150 opportunity cost. This is the 5.5% dividend our 330k could be earning in RAI.

      $18,000 in cash expenses comes from these:

      $2500 heating oil. Heat is included in the apartment rent.
      $7000 maintenance & repair & insurance (an average based on our actual records)
      $8500 real estate taxes

      $36,150 total annual cost of owning and operating the home.

      v. $24,000 rent =

      $12,150 annual premium to live in the house.

      What I’ve tried to do with this post is to provide a framework for others considering the rent/buy issue. What makes most sense is to plug in the actual numbers for a specific situation and see what comes up. I just used ours as an example. Make sense?

      BTW, congrats on “executing” your mortgage last year. Great feeling, that! Where in NH are you?

      • Steve says

        I’m a newcomer to your blog coming over from MMM. I’m really enjoying it! As an engineer I always appreciate a numerical approach to finances and feel that you do a great job of taking a numerical approach to your financial advice.

        While I agree that in your position and example here, you will be making a great move (or maybe already made? I’m over a year later here…), I had a different take on this “apples to apples” comparison you just made.

        Using the expenses you mentioned before, the cost of renting your house were stated as $32,500. 3.5% in the VGSLX would make your cost of owning and living in the house $29,555. In this case owning the home is $2945 cheaper than renting.

        In the second scenario with an opportunity interest rate of 5.5%, the cost of owning increases to $36,150, but you then compared it back to the less expensive apartment (at $24k). The “apples to apples” comparison says that it’s only $3,650 more expensive, not $12.5k.

        I’m closer to the beginning of my career and have many years to save. My family is also still in the growing phase, so I’m looking for houses that are about the same size as the one we are renting; hence my interest in this apples to apples comparison, since we don’t want to downsize from the house we are currently renting. If we were renting your house, it would cost us $32,500. If we then bought your house we would be paying $18k to live in it, and freeing up the $14.5k difference would have cost us $330k. That’s an effective rate of about 4.4%.

        That’s not a bad rate, and it would be a guaranteed return, but I have many years until retirement and am expecting to get a better average return from my Vanguard index fund than that. Add in the costs of buying and selling a home and renting becomes more and more attractive.

        The take home is that it is different for everyone, and running the numbers, in addition to other “real-life” factors that are not necessarily financial, is definitely the right thing to do. In the end, everyone should just be aware of how much their choices and lifestyle are costing them, and then they can choose however they want!

        • jlcollinsnh says

          Hi Steve….

          Welcome! Glad you found your way over here.

          First, good catch! You are absolutely correct in saying:

          “Using the expenses you mentioned before, the cost of renting your house were stated as $32,500. 3.5% in the VGSLX would make your cost of owning and living in the house $29,555. In this case owning the home is $2945 cheaper than renting.” I’ve now corrected that in my reply to Executioner. Thanks!

          As for the second scenario, you can certainly look at it in a the more apples-to-apples comparison. And given your personal situation, that makes perfect sense.

          But I’m more a believer in comparing apples-to-oranges as that better reflects the decisions we make in the real world.

          (for more see my conversation with SC below)

          For instance, as it turned out, my apartment only costs me $1415 a month rather than the $2000 I had budgeted.

          Of course you are right that buying and owning a home is not just a financial decision. That’s why I owned houses for 28 years. For more along those lines you might enjoy:

          Good luck with your own choices! Please keep us posted.

          • Ocelot says

            Hi JL,
            found your blog and podcasts/Youtube appearances recently (started with your Google talk).
            Great stuff!

            Quick question about your calculation:
            For the opportunity costs you use a REIT fund to keep your allocation to RE the same.
            But if I am not interested in keeping a high exposure to this asset class, wouldn’t it make sense to use the broad market returns to calculate opportunity costs?
            Using a very conservative 7% p.a. for the 330k this would mean 23k of opportunity costs per year and would even tip the apples-to-apples comparison heavily towards renting.
            What is your take on this?

            Thanks for everything and kind regards from Germany!

  6. The Money Monk says

    I have seen the argument against home ownership from an investment standpoint before, and while I tend to agree, there is one thing I don’t understand.

    First of all, it can’t be a losing proposition to own, because if it was then you wouldn’t be able to rent. Because nobody would bother owning properties and renting them out.

    Now, you may say “well, rental properties are a different story”

    OK, But if you buy a house, what are you doing if not just renting to yourself? The best, most reliable tenant you could get?

    For example, Lets say you took the $330,000 from the sale of your house and instead of the REIT you bought a rental property. Most people would say that is a good investment (as long as the particulars of that house were sound).

    But what is the point of owning a house, renting it to somebody else , and renting ANOTHER house, from somebody else, for yourself?

    How would your calculations change if you counted yourself as a tenant, and ran the numbers for home ownership that way?

    • jlcollinsnh says

      Hi Mr. Monk…

      great to see you over here and thanks for commenting. great questions!

      It is possible to think of your house as an investment and yourself as the tenant. That is a bit what we do by approaching it with my second set of numbers above titled:

      “Running the Numbers another way”

      Or you could take a look at the numbers in my response to Executioner below for another take.

      Owning rental properties becomes an entirely different thing because of the actual income received and the tax deductions.

      Let’s say I view myself as a tenant in the home I own and even pay rent to myself into a separate account. From this account I then pay the operating expenses. That’s fine as far as it goes. But the IRS isn’t going to want to hear it come tax time.

      If instead, I rent to you all of those expenses are now deductible and I can also take a depreciation deduction as well. Then you buy the same house across the street and rent to me. You can do the same.

      Another issue is the type of house. Our home, in mint condition and at it’s price level, doesn’t offer an investor the same opportunities as a more modest home in need of some repair. You can see this very clearly in Dollar Disciple’s post (see link above)

      If not for these two factors, you are absolutely correct. Personal or rental, the investment evaluation would be the same. But these are pretty big factors.

      Hope this helps?

  7. Six Figure Investor says

    Good article. There are lots of different ways of looking at this.

    From your description, you are going from a house to an apt. Renting will usually be cheaper because the equivalent housing value is lower. Where I live, the average home goes for 750K. The apt I have looks like a bargain in comparison when you compare monthly outlays, but if the apt could be priced at market it will would be much less than half the average home. So, renting beats owning because you are “buying” less property.

    In many parts of the country, owning is cheaper when comparing it by market value. I wonder if you could rent your same house, would it still be cheaper?

    • Trish Rempen says

      To “6-Figure Investor”:
      That’s an aspect of buying or owning that so few people consider: Maybe you really don’t NEED the 3 car garage, the extra media room, the fitness room or the 5th bedroom…!
      When I buy a house as a rental, I always make it a small one – there will always be a market for a small (and hopefully cute) stand-alone house in an area around hospitals and universities.
      Big simply costs more. If you buy it – or rent it – make sure you need it. There’s always a cost involved.

      • jlcollinsnh says

        excellent and important point. This is why we are looking to downsize into a smaller space.

        We are looking to rent because the money will be more productively invested outside a house.

        I’ve noticed most successful RE investors buying houses follow Trish’s path. I would.

  8. Shilpan says

    Good thinking. My wife and I are also thinking about downsizing as my daughters have gone to college. We have a huge house(over 9000 sq feet), which we don’t need for two of us. I’d rather invest my money wisely than to pay mortgage.

    • jlcollinsnh says

      Thanks Shilpan…..

      That’s a lot of house for empty nesters. good luck when you decide to sell. moving ours is turning out to be far more of a challenge than I’d have ever guessed.

  9. Arya Underfoot says

    Hi JLC – found you from MMM and really appreciate this post. I had never questioned the economics of owning vs. renting, I guess just because of that pervasive ‘American Dream’ attitude. I will be much more conscious of the tradeoffs and definitely run the numbers when my time comes, so thanks for opening my eyes!

    • jlcollinsnh says

      Hi Arya….

      and welcome! Thanks for the very kind words and glad to hear you found value in the post.

      Hope you’ll stick around, read some more and keep commenting.



  10. sendaiben says

    Love those final metrics. I made my way over here from MMM’s wonderful site, and am slowly reading all your back articles. Currently renting in Japan, and doing the math our target house price divided by current and (forseeable future) rent is over 100!!!

    Guess we’re staying renters despite the wife’s nesting insticts 🙂

  11. Executioner says

    Per your request, I am re-posting this comment from another location.

    I submit that there are some intangible benefits to owning that will never show up on a rent/own comparison analysis. These have to do with stability and flexibility.

    – Rent can increase
    – Landlord/Property Manager can go bankrupt, die, decide not to renew the rent, decide to sell, forcing you to move

    If you are a renter, it is much more difficult (if not impossible) to do the following:
    – Cultivate and harvest natural resources from your land (timber, crops, livestock, etc)
    – Add-on or remodel at will (add a garage, plant a tree, repaint the interior, add energy-saving improvements, build a shed, destroy a shed, knock down a wall, add a window, remove a door, build a moat and drawbridge, and so on)

    I also re-iterate the point that I’ve made on many blogs in the past (including yours I believe) that if you rent, you are indirectly paying the landlord’s taxes, insurance, and fees. Those costs are unavoidable. The only thing you can avoid as a renter is maintenance costs in the short term, although in the long run you’ll probably end up subsidizing them through your rent payments too.

    Finally, if you value privacy and elbow room, it’s a lot more difficult to find a rental property without neighbors on all sides (often sharing walls or floor/ceiling).

    I’m not saying it doesn’t make sense to rent. However I don’t think it is quite so straightforward as running a financial analysis and going with the cheaper result.

    • jlcollinsnh says

      Thanks E…

      much appreciated!

      Regarding your comments, we are mostly on the same page. There are many non-finacial reasons to buy a house, and to rent. Depends on individual needs and preferences.

      My main point is that running the numbers provides an objective measure of what the comparative cost will be. since most people don’t bother they are unaware of the real cost of their house purchase and rely on the propaganda of the real estate industry.

      Having run the numbers I KNOW my house costs me $5-6000 dollars more each year than the equivalent apartment. Raising my daughter, especially in this school district, made that extra expense worthwhile. Now, not so much.

      Oh, and RE taxes, repairs and maintenance can and do rise very bit as quickly as rent.

      When you get your moat and drawbridge finished, let me know. I’d love to take a ride up to see them! 😉

  12. SavvyFinancialLatina says

    We are currently renting. But since we live in Texas renting is actually more expensive than a mortgage. We are currently saving for a 20% down payment. Want to buy a small 3 bedroom/2 bath home. In Dallas, TX they range from $130k to $150k. Our goal is to put down 30K.
    I’m still not sure whether we should choose a 15 yr or 30 yr mortgage. We could afford a 15 year mortgage, since that and taxes will equal what we pay in rent. But a lot of people (adults who are more financially stable than us) have told us to get a 30yr mortgage, and invest the rest of the money.
    What’s your opinion?

    • jlcollinsnh says

      Hi SFL….

      Welcome back!

      Congrats on running the numbers and your decision to buy.

      Ordinarily, I’d say go with the 15 year and get it done ASAP. But these are not ordinary times. These are times of extraordinarily low mortgage rates.

      If you are absolutely certain you have the discipline to invest the difference and leave it invested for the long term, go with the 30 year mortgage. You can always accelerate your payments and turn it into a 15 year or less if you choose.

      But if you have any doubt at all about relentlessly investing the difference, stick with the 15 year.

      If you would, please let us know what you find and how the deal comes together!

      Good luck!

      • SavvyFinancialLatina says

        We are not going to be buying until late 2013. According to my time table, this is when we will have saved our 20% down payment, and have enough of other savings to feel comfortable to purchase our home. Plus that’s when our lease ends.
        I am pretty disciplined when it comes to investing and I’m positive we will invest the difference. I will let you know what comes of it when we get close to the home buying deadline! Thanks for your advice!

  13. Prob8 says

    I’ve also found that during my tenure as a homeowner, I always have a desire to “improve” the house. A new fence here, a back up sump pump there, etc. Those costs don’t neatly fit into the maintenance and repair category and I doubt I’ll get my money back upon sale. They also add up over time. During my rental years, I never had a desire to spend a dime fixing up my landlord’s place. I also never had to take time away from more desirable pursuits to mow the grass or call multiple contractors to get bids to fix a problem with the house. In retrospect, my wife and I always seemed happier while renting. Perhaps I’ll return to that lifestyle one day.

    • jlcollinsnh says

      That’s a great point, Prob8….

      ….and I do the same with my house. If you have a nice house in a nice neighborhood, it is like a trap. Not only for its own sake, but for future resale value.

  14. Jeremy says

    Great post, I just found this after writing our own take on Rent vs Own for the Seattle area. The tax deduction from mortgage interest may work out to be less advantageous than presented, since a married couple filing jointly has the option of taking the standard deduction; $11,900 in 2012.

    This would make the mortgage interest deduction only a $2,930 reduction in taxes instead of $5,900, although it depends on what other itemizable deductions you may have (state income tax or sales tax, donations, income tax prep fees, etc…)

    We estimated owning was at least a $1,000 a month increase! Like Dividend Mantra above, we didn’t want a piece of real estate tying us down when we started traveling permanently. 6 months in, so far so good!

    Other advantages, in the apartment we paid $0 annually for maintenance, didn’t need to own a ladder or a lawn mower, and our weekends were completely free of maintenance duty. Paying $1,000 extra a month to live in more space than we need, comes with uncertain maintenance and repair responsibilities, is further away from the places we buy groceries and hang out with friends, and places obligations on more of our free time seemed to be a poor trade

    Perhaps I missed it elsewhere, were you able to sell this house?

    • jlcollinsnh says

      Thanks Jeremy…

      and an outstanding point about the tax write off so widely touted. The truth is, the standard deduction is very generous. At $11,900 it takes a pretty big mortgage/RE tax bill to go over it. And even then the only advantage is the excess.

      So, if your house gives you itemized deductions of say, 14,900, the home ownership tax deduction advantage isn’t 14,900. It is the difference between the two: $3000.

      Even at the 25% tax bracket, and as a married couple you’ve got to be over about 90k in AGI to get there, your tax savings in $750. I spent more than that on snow plowing this year. And that’s not deductible!

      Yep, sold! We move April 3 and close on the 8th. More about that to come.

      • Jeremy says

        Your point about needing $90k of AGI to take advantage of the mortgage interest deduction is an interesting one. With a national median income of about half that, a couple would need to be in the top 20% in order to get any benefit.

        • Jim says

          It’s not quite as gloomy as he makes it out to be. Let’s take a couple making $50k and living in one of the 41 states that imposes income tax. They’ll be in the 15% bracket, but also paying (say) 5% in state taxes. Using that 14,900 number for RE tax+mortgage interest (which puts their house somewhere in the ~$200-$250k range I believe), and adding the $2.5k state tax, we get $825 of benefit…more than his $90k couple in a no-tax (and no sales tax, apparently) state.

          It’s an academic exercise, though. If you’re buying a house just to be able to itemize your deductions, you’re doing it wrong. I bought my house because (1)My PITI is half as much as it would cost to rent an equivalent house, (2)It was appraised significantly higher than the purchase price, and (3)I genuinely like working on it and upgrading it to my standards, which I could never do in a rental. Heck, even when I was renting I would usually be the one fixing stuff instead of calling the landlord, so there have been very few downsides and lots of upsides in my case.

  15. Max Schneider says

    I noticed that many people buy a lot more house than they really need (or previously rent) just to cover all the future possibilities (junior will drive his own car one day so let’s get the three car garage just in case even though we currently only have a single automobile) and then put a lot more stuff (which tends to be a lot nicer and therefore a lot more expensive) inside just because they can and then eventually stretch themselves thin and pay much more than they would if they rented.

    Then on the other hand, if you rented all this cash lying around (because it does’t go into a mortgage) might lead to silly purchases of silly consumer goods, therefore the “opportunity cost” of having the cash tied up in a house instead of hard cold cash might not be as great as one thinks it woud be…

    • jlcollinsnh says

      Welcome Max.

      You are right of course. People can be stupid with their money in both directions, and frequently are.

      But based on the comments around here, the readers of this blog are more thoughtful regarding financial decisions.

  16. serious coinage says

    You have to make sure you are comparing apples to apples and not apples and oranges. I think Executioner pointed out one error. Is the apartment rental for $2,000 a month really equivalent to your home in terms of size, neighborhood, condition, etc? I suspect your house would rent for more than $2,000 a month- so the costs are probably about the same.

    Another advantage to owning is that you can change the property anyway you like. You can paint, remodel, etc. You can’t do that with a rental.

    For me, it is a no-brainer to own. My house is worth about what yours is, but my taxes are only 2800. I think you said yours were 8500? Ouch. We have natural gas and last year it was about 600 bucks. Home prices in my area are appreciating, interest rates are very low, and I plan to stay put for 10-20 years or more. Why would I want to pay someone else’s mortgage when I can pay my own and build wealth? I understand the opportunity cost of the equity, but the implied rental value I’m getting, plus appreciation, plus tax deductions, far outweigh the opportunity cost of that money in my situation.

    • jlcollinsnh says

      Welcome SC…

      Here’s my perspective.

      1. Apples v. Oranges only becomes an issue if you are looking at this as an academic exercise. I don’t. The framework I’ve provided here is designed to compare two actual choices someone might be looking at and I used our situation as the example.

      Having said that, if you read my response to Executioner you can see the same framework used in an apple v. apple comparison, again using our house as the example. It works either way.

      People make choices in the real world and running the numbers in the fashion I’ve offered lets them see precisely the financial implications of their choices. If they care to.
      BTW, as it happened our rental cost turned out to be only $1415 per month. $2000 was my best estimate at the time, so that’s what I used.

      2. Theoretically you can change your property any way you chose. But the reality is that if you stray too far from accepted norms your property values will take a major hit. Moreover, those norms change frequently. The tasteful stainless steel appliances and granite countertops you install today might fall from favor and cost you money tomorrow. Almost any real estate professional will caution that remodeling to increase value is tricky and requires very careful planning. Even done well, the payback rarely reaches 100% of the cost. But this only matters if you are concerned about the financial aspects of owning. If not, sure. Do whatever you like.

      3. If you’ve run the numbers and you are comfortable with what they tell you, enjoy your home!

      In fact, I’d say the same even to those who haven’t run the numbers and don’t care to. And to those who have and don’t care what they say. I’m not the least bit interested in persuading anybody about anything here.

      • serious coinage says

        Thanks for responding.

        Great blog, by the way. I’ve enjoyed reading it. I hope you are right about index funds. I also hope I can keep the discipline to stick with them for the long run.

        Thanks again.

        • jlcollinsnh says

          Thanks SC. Good to hear.

          As for index funds, what I can promise you is that they and the rest of the market will be hit by crashes and bear markets multiple times over the decades to come. Your resolve will be tested. Guaranteed.

          Those will be the times that determine who makes money and who doesn’t. Warren Buffett won’t be panicking and running for the exits. I won’t be either. (I made that mistake in ’87) My fondest hope is that the readers of this blog, knowing full well such events are to be expected, won’t either. They’ll stay the course and be richly rewarded. Including you.

          Good luck!

    • Aleks says

      Is the apartment rental for $2,000 a month really equivalent to your home in terms of size, neighborhood, condition, etc? I suspect your house would rent for more than $2,000 a month- so the costs are probably about the same.

      It’s important to separate the “investment” part of owning a property, and the “expense” part of living in a home.

      Everyone has housing expenses. Everyone pays rent. If you own a home, then you’re paying rent to yourself.

      Let’s say that you’re right, and Jim’s house would actually rent for more. For the sake of argument, let’s say it would rent for $2,500. Well, then, by moving to the new apartment, Jim has reduced his housing expenses by $500 per month, or $6,000 per year.

      By selling the property, Jim has reduced his gross rental income by $30,000 per year. But he’s also reduced his expenses by $18,000 per year. That’s $12,000, which coincidentally is about the same amount of money that Jim could earn from investing in VGSLX. And there are extra expenses in owning a property that someone else lives in.

      So even at a $2,500 estimate, Jim comes out ahead in two ways. He reduces his housing expenses by $500 per month, and he moves his equity into an investment which is more liquid and has higher returns.

      Now, if Jim’s house could fetch $3,000 per month, then you start to get into the territory where it would make sense for him to keep the property as an investment. But at that estimate, the case for renting becomes even more obvious; Jim’s new apartment will save him $1,000 per month in housing costs!

  17. Tom M. says

    Good advice – I will think twice now about leaving a job where the housing and utilities are provided in order to go build a house. I also appreciated the calculator you included showing percentage of savings to years it will take to retire. This has made me seriously re-think my current situation…

  18. Blake says

    I’ve been poring over these numbers since hearing your analysis. One question though, wouldn’t the equity in your home rise with inflation? This would give you an approximate 3% gain annually, and so your true opportunity cost would only be the 3.5% from your dividends minus 3% inflation of your home price for a total of 0.5%. I did some net present value calculations to compare 30 years of owning vs. renting. Being able to sell the “asset” in year 30 makes the extra on-going costs of buying moot. Although you then have to find another place to live, so maybe the calculations are different for a perpetuity.

    Any thoughts?


    • jlcollinsnh says

      Hi Blake…

      Certainly a house could rise in value over time, as could the proxy. I discuss this in the post above:

      “Of course, the house might rise in value providing me with capital gains. But VGSLX has this same potential. In actual point of fact, the fund is the more conservative investment. Here’s why:

      VGSLX is a broad based fund holding investments in numerous properties all across the country. The house is a far more focused holding: one property in one neighborhood in one town in one state. As such it could provide greater or lesser gains.

      During 2011 VGSLX rose about 12% while my house value continued to slide. 2012? Who knows? Maybe the house will outperform.

      Since this is unknowable, as predicting the future always is, and since the investments are both real estate, we can for this analysis treat the potential as equal. Clearly if you strongly believe your house or the alternative investment will do better you can factor this into your thinking.”

      Make sense?

  19. Brian says

    What about factoring in income taxes. Some numbers I’m getting are:

    Let’s say you have a 33% tax rate and are renting a similar home (not apartment).

    $0 heating oil will be the same for both homes
    $7000 maintenance & repair & insurance (seems high to me for a $350k house, but we’ll go with it)
    $5,695 instead $8500 on real estate taxes – Assuming you itemize deductions
    $12,695 total cash expenses =

    (Comparable house is $30k to rent, not $24k for an apartment as mentioned)
    $17,305 positive cash flow in house, minus

    $7,626 instead of $11,555 factoring in taxes on the dividends =

    $9,679 annual investment surplus, i.e. cost of house over renting.

    (note that this doesn’t include capital gain taxes that you would owe on VGSLX either)

    • jlcollinsnh says

      Hi Brian…

      and welcome!

      When you own a home two things are tax deductible from your federal income tax:

      1. Your real estate taxes.
      2. Your mortgage interest and points, if any.

      The industry loves to make a big deal about this.

      But the first thing you want to take note of is that the government allows everybody a Standard Deduction. For 2013 it is $12,200 for married filing jointly and $6100 for singles.

      So looking at my personal example of no mortgage, even living in a state with an exceptionally high RE tax of $8500, I am no where near itemizing. So owning provides -0- tax advantages.

      That’s how I handled it in the post’s first scenario.

      However, in the second scenario we assumed a mortgage and did in fact include the tax deduction:

      $8500 real estate taxes
      $15,120 estimated interest on our mortgage loan @ 4% (note: the portion of your months payment that is applied to principle should not be included for this purpose although you will want to add to to calculate your cash flow number)
      -$5905 tax deduction savings. This assumes a 25% tax bracket and includes the real estate tax and mortgage interest above.

      Of course, given the standard deduction I have overstated the tax advantage benefiting the homeownership numbers. More accurately:

      $8500 real estate taxes
      $15,120 estimated interest on our mortgage
      $23,620 deductible expenses
      -$12,200 standard deduction
      $11,420 in deductions over standard.
      x 33% bracket*
      =$3769 tax savings.

      That’s a even less than the $5905 tax deduction savings I originally calculated at only the 25% bracket. BTW, the 25% bracket is good up to $$223,050 (married filing jointly) in adjusted gross income. Single is 25% up to $183,250.

      *Hitting the 33% bracket is very high income indeed.

      Since I hold VGSLX in an IRA, capital gains taxes are a non-issue.

      • Brian says

        $5905 is not a small amount of money. You should also note that this is assuming you’re married and filing jointly. For a single person, the tax savings is even more substantial.

  20. Iain says

    It looks like your last calculation neglects the leveraging effects of a mortgage. With 20% down, if your house appreciates by 3%, your equity goes up by 15%. With your numbers, that 3% would be around $10,000. Even supposing that the investment you are missing out on had the same 3% gain, that is only on the 66k – about $2,000. So, on a 3% rise, your calculation misses $8,000 on the plus side for buying – enough to flip the verdict. Of course, leverage increases risks on the downside, too. Prices may or may not return to their historical upward trajectory. But it is clear that the rent/buy decision is far more significantly affected by expected house price movements than your calculation suggests.

    • jlcollinsnh says

      Hi Iain…

      and welcome.

      I think you may have missed the “Capital Gains” section in the post? In part it reads:

      “During 2011 VGSLX rose about 12% while my house value continued to slide. 2012? Who knows? Maybe the house will outperform.

      “Since this is unknowable, as predicting the future always is, and since the investments are both real estate, we can for this analysis treat the potential as equal. Clearly if you strongly believe your house or the alternative investment will do better you can factor this into your thinking.”

      As you observe, leverage is a two edge sword. Failing to understand this is one of the things that brought so many to grief when the housing bubble collapsed.

      That said, if you have reason to believe the price of a house you are considering will go up (or down) in value, you can certainly factor that into your calculations.

      Just be sure you are basing your assumption of appreciation on some tangible factors rather than wishful thinking. As a point of reference the historical appreciation of houses is ~1%.

      Good luck!

      • Bill Joyce says

        Hi Jim,

        Where did you get the figure of 1% as the historical appreciation of houses? And even at 1% it should consistently contribute $3300 to the ‘own’ side of your equation.

        I prefer your apples to apples version for comparing the financial wisdom of buying a home versus renting. I agree with your comments about making choices on how you want to live and spend your money. I would be interested in the numbers had you bought a more modest home (comparable to the apartment in size and quality). But mixing a financial argument with lifestyle and value choices, clouds the financial comparison in my view. Clearly renting a small apartment is less expensive than buying a bigger house. I’m not sure that needs to be proven.

        In your section “What about mortgage interest payments?” you compare renting to a purchase with 20% down, however in your specific case you would have been able to reinvest the $264,000 (equity) with projected returns ranging from 3.5% (up to 5.5%) for a conservative increase of $9,240 to owning. This would make the smaller apartment a $7105 premium over the larger home.

        I disagree with your view that a home is not an investment, but perhaps that is simply a matter of definition. Is a savings account an investment? CD’s? Regardless, I think we agree there is a financial component to home ownership that can be financially advantageous and people must understand more accurately how they compare before deciding to buy or rent.

        It would be interesting to see all these qualities compiled into a comprehensive buy vs rent calculator.

        We definitely agree that the ‘dream’ of home ownership has been over sold and a home purchase should be far more of a financial decision than it actually is. We need to help people find the right place, time and circumstances that allow a home purchase to be a financially sound choice.

        I enjoy your blog very much, this is a story that needs to be told.


  21. JayP says

    Hi Jim, love this analysis(and your site). One question – should you be comparing your $330K home to a small apartment? Wouldnt it be more “apples to apples” in comparing a similar townhouse/condo to the apartment? One could argue that you have more space and features in the house than the apartment(as well as the added expenses).

    In our case, we have children and pets. We were renting a similar detached home. As the rent was $2500 it turns out to be much less expensive for us in owning a similar home(around $300K). In our case, the utilities are equal in both options. However, if we were sans children and dogs and planned to travel many months of the year, I would certainly opt for a cheaper alternative.

    There was also the feeling we had in the rental. A sort of uneasiness that the manager could up our rent or evict us at his choosing.

    Thanks again for the great articles!

    • jlcollinsnh says

      Hi JayP…

      Welcome, and glad you like it!

      Apples v. Oranges only becomes an issue if you are looking at this as an academic exercise. I don’t. The framework I’ve provided here is designed to compare two actual choices someone might be looking at, and I used our situation as the example.

      Having said that, if you read my response to Executioner above you can see the same framework used in an apple v. apple comparison, again using our house as the example. It works either way.

      People make choices in the real world and running the numbers in the fashion I’ve offered lets them see precisely the financial implications of their choices. If they care to.

      Once you have a sound handle on the numbers you are in a better position to evaluate the lifestyle issues, deciding what such things are worth to you.

      Sounds like you’ve not only run the numbers, but lived both options as well. 🙂

      If owning the house is both less expensive and better for your needs, well done!

  22. Simon Kenton says

    I had posted the comment below under the 4% post but Mr. Collins suggested would be more relevant here:

    I think you are better off – safer – if you treat the house as a house, not an ATM or a savings account or an investment. Basic rule: If you are not willing and able to sell an asset in 5 days (settlement period) you don’t own it. Move it into the net worth column of your kids. This is true for a lot of hard assets (which are peculiarly soft, financially speaking) like guns, jewels, collectibles, as well as houses. The other point about hard assets that needs to be hammered home is that they are a rich field for self-delusion. They are so illiquid that you think they are worth what a neighbor said at a cocktail party; or a half-remembered Sunday Supplement article may have said if your memory serves; or what you paid for them; or “goodwill;” or “great growth prospects;” or what the county assessor has hoked up as a ‘valuation’ in order to increase your taxes. Never value any of them at more than your cost; and you’ll be better off to set them at zero (“$0.00″) in your annual financial retrospective and your future projections. Review Graham – an investment is an operation that upon mathematical analysis promises safety of principal and regular paid returns. A house doesn’t make it unless you are renting part of it out. Pay it off ASAP with heavy infusions of cash flow (NOT principal) from other real investments while the loan is young and either 1) drop it out of the net worth if you are going to live in it, or 2) make it a rental while moving to a smaller place. If you transmute it to a rental you may restore it to the net worth column.

    This advice is sound partly because if you follow it, the surprises you get when you sell out of a particular hard asset will be positive, or at least non-negative.

    • Kurt Knapp says

      “Pay it off ASAP with heavy infusions of cash flow (NOT principal) from other real investments while the loan is young”

      You favor paying off your home with the returns of your other investments versus re-investing those returns?

      If the house is draining say 3.375% (my mortgage rate) and stocks “return” say 7%, wouldn’t it be wise to “net the difference” by paying the minimum monthly mortgage payment? Paying it off early locks in a 3.375% return where taking cash flows that would be used to pay it off early and invest in the market would produce a 7% return.

      Perhaps this is a “make the best of it scenario” meaning one shouldn’t buy a house in some instances. But if you do, and lock in a low rate, shouldn’t one “make the best of it” and ride out the “cheap money”?

      In other words, I’m sure banks would prefer that I pay off my 3.375% loan so they can loan it out at today’s rising rates, for the same reason I should want to “hold onto it”, now that I already have it.

  23. MDM says

    Just an observation regarding the Post Script. To recap briefly the two methods are
    1. If House price/Annual rent is 21+ renting is better, 16-21 it’s a toss-up, less than 16 is a vote to buy
    2. Monthly rent x 110 = house price. If the house costs more, rent. If less, buy.

    But we can plug #2 into #1 and get
    (Monthly rent x 110) / (Monthly rent x 12) = 110/12 = 9.2

    So #1 says a ratio < 16 means buy, while #2 says the ratio has to be < 9.2.

    No idea which, if either, is "correct", but they are certainly different.

    • Brovan says

      MDM, we were thoroughly confused by the same issue. I went to comment and saw that you beat me to it. Perhaps we could conclude that a ratio of under 10 is a strong sign to buy, and a ratio over 21 is a strong sign to rent, and the “toss-up” range is WAY bigger than expected? 😉

    • jlcollinsnh says

      Hi MDM & Brovan…

      Your points are well taken and they are the reason I ended that Post Script with this:

      “So maybe these are not much help. More useful, I think, is to look at actual numbers for a given situation as we did above.”

  24. Heywood says

    There is no example where the “$6000 positive cash flow in house”
    is invested in VGSXL or RAI.
    The “$6000 positive cash flow in house” does not just evaporate.

    • jlcollinsnh says

      Point well taken, Heywood…

      …that $6000 could be deployed into an investment that would, hopefully, increase in value and/or pay a dividend.

      For those with the discipline to actually do this, adding the calculation into the mix would give a sharper picture.


  25. Richard says

    I love the article – it’s great how it includes opportunity cost. It’s funny how whenever you talk to people about this subject they seem to assume that owning is better, even though they typically never look at the numbers!

    I have a question about the mortgage interest rate that you mention. You include:
    15,120 estimated interest on our mortgage

    But where did you get this number? If I use a mortgage calculator with 4% interest over 30 years I get a total of $189,735.50 interest. If you average that out over 30 years that’s only $6,324.50 per year.

    Am I missing something?


    • jlcollinsnh says

      Hi Richard…

      Great question/observation.

      What you are missing is that interest on a mortgage is paid out as a yearly average. Instead the mortgage payments at the beginning are mostly interest with a bit of principle. Over the years,this shifts as the amount owed is slowly paid down. Toward the end the monthly payments go mostly to principle with a bit to interest.

      In my example I used the interest/principle from the first years as we are comparing own v. rent at the start. In the later years the amount of annual interest would drop and the equity would build as would the opportunity cost of having that equity tied up.

      Hope this makes sense?

      • Richard says

        Yes, that makes sense. Except….it looks to me like the interest in the first year would be $10,475, and then decreasing over time until the last year only $322 would be paid in interest. So, the numbers I’m getting still aren’t as high as your estimated $15,120.

        It seems to me that you would want to consider the number of years you expect to pay the mortgage. Otherwise your estimated interest costs would be higher than what you would actually pay in interest over the course of the mortgage (since it decreases over time).

        I believe I have two other observations that I haven’t seen any comments on.

        First, the opportunity cost would increase over time. As you pay the principal down, you keep increasing the amount of money invested in the house, so your opportunity cost would continually increase. (…giving renting a bit more advantage over time)

        Secondly, over the course of many years you would see your rent increase quite a bit, whereas the mortgage cost is essentially locked in at the start. (…giving owning a house a bit more advantage over time).

        Please correct me if I’m wrong!

        • jlcollinsnh says

          Hi Richard….

          Well shucks…

          …now you have me wondering just how I arrived at that $15,120 figure in the first place. Usually with a mistake like that I can see how it was made, but after a fair amount of pondering, I’m at a loss, and I’m surprised nobody caught this before. The post has been up over two years!

          In any event, I’ve refigured and updated the numbers:

          Interest on $264,000 at 4% comes to $10,560 on my calculator. Plus I had to refigure the tax savings which now drops to $4765.

          Net result: $2105 premium to live in the house.

          Of course, as I pointed out in Addendum IV:

          I also vastly over estimated the cost of our apartment. Rather than $2000/$24,000 per month/year, the number I used in the post scenarios, the actual rent is $1415 per month, $16,980 for the year.

          Since these numbers are only used as an example to illustrate the concepts, I don’t feel the need to recalculate them with the actual rent in the post. It is the technique that matters and in applying it folk’ll want to use their own numbers anyway.

          Thanks for the fact-checking. Let me know if I got it right this time!

          • Richard says

            Hi Jim / Mr. Collins!

            Like you, I’m not interested in seeing your numbers recalculated with the actual rent, but I am very interested in the concepts that would lead to results specific to ones situation!

            I’m glad we’re now on the same page regarding the interest payments!

            I’m also curious what your thoughts are on my additional two observations I pointed out in my last reply…..

            I’ve also now run across this, which might be useful to anyone reading this:


            I haven’t looked at the details, but I like that it includes opportunity costs and you can adjust all the values…

            ~ Richard

          • jlcollinsnh says

            1. Yes, opportunity cost will increase over the time you own the house. Both as you pay down the debt and if/when the value rises.

            2. Over time, assuming a non-deflationary environment and the absence of rent-control, rent can be expected to increase. But one of the advantages of renting is flexibility and the ease of moving. Should a given apartment, city, state or country become too expensive relocation is simple.

  26. Robin says

    Personally i think the owning is better if you have a good finance to buy a own house and if not,then renting is’s good describe you the opportunity cost which even i don’t know proper about that.

  27. Ricky says

    The takeaway is of course that its prudent to run the numbers on any investment decision. All investment decisions have opportunity cost.

    I can see how some are getting the feeling that you are advocating for renting rather than buying. Of course its not always a clear cut as that, as you admit.

    What you REALLY need to know is how small of a house you are willing to downsize to, find comparable rents and home values and run the three different scenarios (staying put, renting smaller home, owning smaller home) against each other. I think that is the main thing that this article leaves out.

    For instance, if you’re now going to rent for $2,000/mo then figure out the actual value of the property you’re looking to rent. Then run the numbers and see if you could find similar properties selling for similar prices and compare owning the cheaper home vs renting the cheaper home.

    For prudent financial planners like yourself, and ones that read this blog, I’d imagine owning is almost always possible and better as long as you don’t want a house well above $150k (depends on area of course, but average). Renting will probably still make more sense in San Francisco, Honolulu, Seattle or New York no matter how you look at it. But for the vast majority of the country, I think there is an avenue to owning that is almost always better.

    So basically, if owning the house yearly + opportunity costs is cheaper than renting yearly then its better to own the house; because, like you say, everyone pays housing costs no matter what.

    • Jason says

      I have never lived anywhere that renting would cost less than buying a similar house.

      My wife and I are currently renting in the Portland area. (We made the mistake of buying our last house too soon so we are renting for a year to learn the area.) Anyway, our rent is $1695 on a house that our landlord purchased less than a year ago for $260,000. We could make payment on a 15 year loan, homeowners insurance, and taxes for less than that. The New York Times rent vs. buy calculator puts our break even point at $951 which sounds about right.

      One advantage of owning is the opportunity to reduce the cost of maintenance. When one owns they have the opportunity to do these things themselves and save money or pay a professional. When ones rents these will be done by professionals and the cost built into rent.

      Another opportunity for savings is energy efficiency. A homeowner has the incentive to upgrade the efficiency of appliances, add insulation, etc since they are paying the utilities. On the other hand a landlord (or spec builder) has the incentive to purchase the least expensive option regardless of long term costs. Why would a landlord pay a penny more in capital to reduce operating costs since they the operating cost is passed on the the renter?

      Owning also has savings if one is looking to retire early. Once the mortgage is paid off housing costs decrease dramatically. That allows for much lower monthly expenses and the opportunity to greatly scale back work or retire completely. Renting and saving the (for me non-existent) savings does not offer that option. Rent has to be paid every month with after tax money. Either one has to save in taxed accounts or pay a penalty plus taxes to withdraw money from tax-deferred accounts. A penny saved is worth more than a penny earned because savings aren’t taxed.

  28. Roger Van Zanen says

    The lady who thought a clapped out Camaro was worse than a house should check Kelley blue Book. The numbers for the most recent version of Camaro (2010-2015) cheapest price are as follows:
    2015 19550 zero miles Cost per mile – unknown but possibly 5-10 cents
    2014 18800 6700 miles Cost per mile – 11 cents
    2013 18695 11300 miles cost per mile – 8 cents
    2012 16935 38,000 miles Cost per mile – 6.5 cents
    2011 14990 66000 miles Cost per mile – 7 cents
    2010 16400 61,000 miles Cost per mile – 5 cents

    Based on this, I would buy a Camaro before getting a house

  29. Tom says

    Excellent article. This week I had an offer accepted to buy a 2 bed apartment and so stumbling across this article was perfectly timed for me.

    Based on some napkin math, I was pretty sure that buying was the better decision financially but I’ve just spent the whole morning making a spreadsheet based on this article to get an exact figure for my personal situation.

    Buying does indeed work out better for me, even when comparing buying a two bedroom apartment against renting a one bedroom apartment (although I’ve had to guesstimate at maintenance/repair cost per annum as I have never owned property before), although this result is probably because in my area, all rents are increased by inflation annually and so renters perennially pay above the market rate unless they are prepared to move every two or so years, which is a little tedious.

    My calculations have also revealed to me that it will take approximately a year before the reduced cost of buying covers the associated costs incurred making the purchase (legal fees, mortgage booking fees, double paying rent and mortgage for a month or two while we move, other associated moving fees).

    Renting vs. buying always seems like a debate that people respond to emotionally, rather than logically, and we all know that emotions and personal finance is a dangerous combination!

    • jlcollinsnh says

      Hi Tom…

      Great to hear this post was useful to you in your recent purchase decision. My guess is that, knowing how the numbers worked you will always be more comfortable in your new place. It is always great when what you want to do is also the best financial choice.

      But even if renting had been shown to be cheaper, you still could have bought.

      Knowing the the numbers in that case would have allowed you to decide if the extra money was worth it. This was the case when I bought my houses. They certainly cost more than renting, but I could afford them and they were an expensive indulgence I was willing to pay for.

      And, boy howdy, are you right about this subject being an emotional trigger! This post, and those I’ve linked to in it, have gotten me the most hate of anything I’ve ever written. 🙂

  30. Refinerr says

    This post is awesome! I really enjoyed the quick calculations below for a fast way to confirm what you’re getting yourself into without having to make a career out of it. Thanks again!

    • jlcollinsnh says

      Thanks Refinerr!

      That’s one of the basic premisses of this blog: Once you strip away the nonsense put out by the vested interests, this stuff really is pretty simple.

  31. Brian says

    Pardon the new guy question. Why wouldn’t the principle portion of the mortgage payment be included in the cost owning? It sure seems like a cost to me.

    • jlcollinsnh says

      No pardon required, Brian…

      Good to have you here!

      If you think of it in terms of a balance sheet, each time you pay off a part of the principle you increase your equity. So those dollars are buying part of the house, an assets you own.

      That said, it is easy to see why it seems like a cost and, in the sense of Cash Flow, it is.

      That is, that cash is removed from your pocket and locked up in the equity of your home. And that is what leads to the opportunity costs (which don’t effect cash flow but do effect your costs) discussed in the post.

      Make sense?

  32. Andy says

    Hi Jim,

    I spent most of this weekend pouring over all your articles, including many of the links. Wow! What a wealth of information (pardon the lame pun!). I was particularly struck by your advice/opinion regarding house ownership. I bought a fixer-upper in a popular college town for $140,000 cash in 2010, and after sinking a another $120,000 (thanks to a mortgage) into it have a house worth close to $370,000. When I bought the house my wife and I had dreams of living in it at least 15 years. We are now 5 years in and, though we enjoy our house, are wanting to travel a lot with our 9 year old daughter. I run a small business that pays for us to live reasonably well (I’m drawing $50k p.a.), but not enough for us to travel more than two weeks once a year. Your articles were truly inspirational! We are now toying with the idea of selling our house, investing at least $200,000 of the proceeds into index funds (my company SIMPLE IRA is already invested in VTSMX), and holding at least $20,000 back in a ‘Travel Fund’.
    Obviously this is a big decision to sell up and ‘risk’ our equity in the stock market, but after running the numbers it seems we could hit 60 (we are both 43 now) with approximately $1 Million in investments, which would make for a comfortable retirement! Though house prices are rising here, I can’t see us realizing that level of profit from selling our house in 17 years (especially given the on-going costs of home ownership: rising property taxes, maintenance and repairs, etc).
    So, I wanted to thank you for your website, and for giving us a fresh perspective on our future. We love our house, and it has a lot of our blood, sweat, and tears in its walls. But a comfortable retirement, and the ability to travel with our daughter now, is far more compelling!

    Kind regards,


    • jlcollinsnh says

      Hi Andy…

      Thanks for sharing your story.

      It’s great that your house has worked out so financially well for you. Deciding what to do next is a rather delightful problem to have! 🙂

      It’s nice to have options.

      If you decide to sell the house and go with index funds, remember and expect the ride to be volatile. It just part of the process.

      It is with houses too. The difference is you can’t drive yourself nuts looking at the exact price of your house as it fluctuates as you can with a fund. 😉

      All the best on your journeys, financial and otherwise!

  33. Chris says

    Hi Jim,

    Much like Andy’s post above, I’ve spent hours reading through your articles. The information is incredible. Hat tip to you for putting this website together!

    Based on the information above, I am resisting home ownership. I’m 30 years old, married and expecting our first child soon. We have $100k cash, $50k in retirement (0.53% fees), $20k in debt (Student Loans – Interest rates under 2.3%), and take home $12k per month.

    We live in SD and home prices are expensive. Here is how the numbers worked out…

    $600k/$23,100 = 25.97


    $1925 x 110 = $211,750

    We were looking into buying a duplex or triplex as our first home and renting our the other units OR buying a single family home OR buying a rental property with roughly 12% cash on cash return.

    BUT, after reading your blog…I’m looking into paying off the remaining debt and pumping money into VTSAX and VBTLX.

    Would you suggest paying off the debt even with that low of interest rate? I’ve been told to never hold debt above the rate of inflation and debt below inflation is considered “good” debt.

    Also, how do you feel about investment properties with high cash flow?

    Your insight is appreciated,


    • jlcollinsnh says

      Hi Chris…

      Thanks for the kind words and I’m pleased to hear the ideas here have helped you in your thought process.

      I hadn’t heard that rule of thumb “never hold debt above the rate of inflation and debt below inflation is considered “good” debt.” But I kinda like it.

      At 2.3% your SL interest rate is a bit above the inflation rate, but I’d still probably pay it off slowly and focus on investing instead.

      Investment RE is too much like work for my taste. 🙂
      But there is money to be made. Given the risks and effort, I would only buy when the numbers looked exceptionally sweet.

      It has been a long time since I owned rentals, so I’m not the best person to ask. My pal Paula seems to have a great handle on making it work:

  34. Allen Sharp says

    Out of curiosity what are spending on maintenance exactly? 7,000 dollars sounds like a lot of money to spend each and every year. Also, shouldn’t you calculate the size, age, and type of house (brick vs log – more maintenance) in cost vs rent? I think the main point has to do with what perspective one takes. For example, living in a home for a long time vs the freedom or option to move whenever you want.

  35. Jim says

    Hi Jim,

    I see this was an older article but I am just getting around to reading it now. The interesting thing is I have been trying to make the decision on whether I should sell my house for the last couple of years. I bought my house around 12 years ago and have enjoyed living here but the last little while, as you mentioned in your article, I’m just not into the whole maintenance piece. I would rather have the freedom of when leaving to travel or go out of town for a few days of just locking the door and not having to find a friend to check in to make sure things are okay or to pick up the mail and papers laying around in front, I still get home mail delivery and the community paper delivers every week (unpaid newspaper).

    My situation is probably a little different from you when you sold, I live in Toronto Canada and prices have been climbing like crazy here, I wouldn’t buy my house at the price I can currently sell it. I do owe a little on the house but even after paying off all debt I would still clear somewhere around $400k. Like you I have been comparing the cost to rent versus my expenses to run my house and the income I could generate from the sale. The numbers actually work out very favourably for me, the cost to rent and my house upkeep costs are basically a wash so any income generated is a bonus.

    Where I keep stumbling is its been a while since I’ve rented and was wondering how you found the change going from owning to renting? Before buying I had always rented and over the whole time I only had one place that I had issues and I ended up moving to resolve the issue.

    • jlcollinsnh says

      Hi Jim…

      Sounds like we have more in common than just our names. 🙂

      We’ve been renting for two years now and love it.

      Last week we had a circuit breaker start tripping on a regular basis. When I owned the house I would have had to find an electrician and worry about if he was competent and honest, how big the problem was and what it would cost. Renting I just sent an email to the office and a couple of hours later our building handyman was there tracking it down.

      Of course, nothing is perfect. At the moment we have upstairs neighbors who are not as quiet and considerate as we’d prefer. But when the record levels of snow were falling this past winter I could just enjoy it knowing I’d never have to take a shovel to it.

      In a couple of months our lease ends and we’ve started to look around at what else is available that might be fun to try. If we decide to move, no hassles staging the place and trying to sell. We’ll just hire movers and we’re gone! Wings!

    • jlcollinsnh says

      Thanks Joel…

      As it’s not my site and I can’t fix it, I’ve removed it from the post.

  36. Arttu says


    First, a huge thank you for the series of articles. I’ve read almost all of them and I’m confident the concepts will become useful for me. Especially what you wrote about how to think about money.

    I realize most of your discussion on this site is for audience in the US, but I wanted to give an example of a situation where buying makes sence.

    We live in Helsinki, Finland (northern Europe, not Minnesota) and we are in our third purchased apartment now. The flats and budgets have been rising on every step, but the rationale is always the same. First buy an apartment that needs fixing from a reputable but not ridiculously expensive neighbourhood, then renovate it yourself paying for only the jobs your have by law, stay in it for two years and sell. The trick here is that selling your own apartment or house after living two years in it will set you free from paying taxes from the profit you’ve made. Since renovations were mostly material costs, this has provided us some nice gains.

    As we have used mostly debt to buy the flats, calculating profit for invested capital wouldn’t provide very useful numbers. But one example: be bought for 180k, used 20k to renovate and sold for 280k two years later. Given the low interest rates, this deal got us out from whole bunch of expensive credit cards and some. And I would consider this as an investment, even though I’m yet to start investing in the stock market. 🙂

    But the main point was to discuss another angle to see the numbers. I didn’t read all the comments, so perhaps this was already mentioned.

    The point being that living costs, no matter what you do. For us, the rationale for owning has always been that the amount of money needed to be spent each month has always been lower when owning vs. renting a similar apartment from a part of the city we have wanted to live in. Downpayment, interest and maintenance costs have been lower or equal to monthly rent.

    Next thing is that the money you pay as rent is going to go away from you forever. Whereas when owning, part of that money is paid for bank as interests, some to other maintenance costs, but most of it is going to reduce debt. And when we are going to sell, those payments will become liquid assets in our pockets. I see that money as saved, not invested since it didn’t gain any new value (apart from the fact that housing prices here have been rising for decades, and the renovation gains I mentioned.)

    So, sometimes there is money to be made and saved when owning.

    Thank you again for the inspirational writings!

    • jlcollinsnh says

      Welcome Arttu…

      Always nice to hear from my readers in Finland!

      If you run the numbers and owning is the better financial choice, you’ll get no argument from me. Although, at this point in my life, I personally pay a premium for the freedom and flexibility renting offers.

      Later this month we’ll be moving into a new luxury high-rise. We’ve enjoyed our two years living in the loft apartment, something I always had wanted to do, but now we are ready for a change. So easy to just let the lease end and pack up. Plus there is a two month gap between the old apartment and the new so other that storage fees for our stuff, we are rent free for July and August while we travel. 🙂

      One thing I’d point out: If part of your gains in renting come from renovations you should also calculate and deduct the value of your time as well as the materials your buy. Renovating real estate moves beyond being an investment and into the realm of a part-time job.

      Glad you are enjoying the blog!

  37. Dan says

    Thanks for the article, it’s given me a new way to think about our house situation. One thing I don’t understand with your formula, you say in your example the house is a better cash flow situation as you are paying out $18,000 in expenses instead of $24,000 in rent. Wouldn’t the $11,555 a year you’re getting because you’ve sold the house, invested in Vangaard, and pocketing the dividend offset the $24,000 rent so cash flow is now $12,445 a year, beating out the owning house cost by $5,555? I’d think this makes the rental better on cost and cash flow.

    • jlcollinsnh says

      Hi Dan…

      Glad it helped!

      You are correct that the $11,555 can be used to offset (pay) part of the rent. But it is still cash flowing out of my pocket, which is why I present it as I did.

      So on a cash flow basis, it takes less cash to own and run the house. But as you correctly point out, in total renting in this case is cheaper overall.

      Make sense?

      • Dan Milton says

        Yes I see. Cash flow vs overall costs. Owning the house doesn’t make cash flow like the dividends, it’s all on paper until you sell. I see, you make decisions on cash flow depending where you are at the moment, holding the house or owning the dodo end flow, but the overall cost give a net figure.
        Anyway you’ve got us thinking, we want to retire in 10 years and spend winters in the Philippines so it’s good to to the objective numbers to make it happen.

      • Jay says


        I looked up that VGSLX fund and they paid no dividends for 2015.
        How does this effect your plans, this is from curiosity not criticism.


        • jlcollinsnh says

          Hi Jay…

          VGSLX is in fact still merrily paying dividends. They are paid quarterly and the last was $1.08 per share paid June 24, 2015. Current annual yield is 4.07%:

          But if it had stopped paying dividends and dividends were my sole reason for holding it, I would look for another investment that better suited my needs. Or in the case of the analysis in the post above, was a better proxy in looking at opportunity costs. But VGSLX still fills that role nicely.

    • jlcollinsnh says

      Hi Val…

      That’s an excellent video and balanced as to the pros and cons of both renting and buying.

      It is now an addendum above.


  38. No Nonsense Landlord says

    The opportunity cost to move closer to your job, or move to a different state on a whim is huge. Or the not having to buy lawn equipment, lawnmowers, snow blowers, etc. When your neighborhood goes to crap, you can move.

    There is a lot to be said for renting.

  39. der says

    You sold homes at the bottom of the century- 2012.
    Unless you dont follow market trend and news media at all for some reason, you’ve shouldve known that wasnt the time to sell.

    But you could argue the liquidity move to stock market in 2012 was a best move.
    Then again, depending on the mutual fund, it may get you somewhere 7-15% only where as real estate in some areas up as much as > 100% in west coast.

    You not from Az are you? 🙂

  40. Thomas B says

    I love your website and the clarity you frequently bring to “complex” concepts.
    This is a great case in point, however I did not see anywhere the fact that for every mortgage payment there is an increase in principal, a bonus savings if you will. Granted this “savings” only “earns” anything once house is sold and hopefully has appreciated, but it is one of the positives of owning.
    Once rent is payed the only “savings” is opportunity cost.
    We own our home on a 15 year at 3%. We rent out the downstairs for $1300/m, mortgage is $2200 and to rent the part that we live in would be an easy $2000/m so we have made it work for us. The numbers made our decision easy.

    • jlcollinsnh says

      Thanks Thomas…

      Good to hear my writing makes sense!

      The principle part of a mortgage payment is a forced saving plan of sorts and I’ve known people who wouldn’t have any savings at all otherwise.

      Sounds like you’ve found a solid housing situation for yourselves. Well done!

  41. DJStrong says

    Great article, I have been reading a lot on this site and it is a literal treasure trove. My wife and I are going to be making some big decisions in our immediate future and articles like this are invaluable.

    Also James sounds exactly like how I imagined him

  42. Maia says

    I think I found your articles on why your home is a bad investment and your blogs on renting v. owning just in the right time BEFORE I put all of my cash into a new home!

    I have literally NO ONE to rely on for advice on my current situation (other than ppl online or realtors, and I do not trust the realtors). So I would GREATLY appreciate it if you could offer me some solid advice.

    I inherited my mom’s house that she purchased in the late 70’s and there is no mortgage. It’s a very large home on 10 acres and living here has made me realize two things: 1) I am not cut out to be a home owner because I do not fix anything on my own, and 2) I do not care about having property because I dont do anything outside except suntan (plus I loathe property taxes). BUT I LOVE privacy and nature!!
    My property taxes alone are $5,000 a year. The house has never been updated or very well maintained. According to all the contractors who have seen the home, they recommend not putting ANY money into updating and just sell “as is.” The home is very outdated and it was listed for sale in 2013 with no offers. The lowest price it was listed at was $380,000. Now one realtor has agreed with the contractors and told me I should list the house “as is” for $350,000 this coming summer. Other similar homes in the area are listing for $430,000 and selling, but they have been updated and have actual farmland (mine is just 10 acres of trees) and have been better maintained. Would you agree with listing the home “as is” or do you think putting $50,000+ into updating would be better and then trying to sell at a higher price?

    Initially, my plan was to downgrade and put as little as possible into a new home so I could use the left over cash to invest in stocks. But after reading your posts, I am seriously considering not purchasing and just renting. This is what I would greatly appreciate your advice on. I also loathe any visible neighbors and I have not found any property I would want to buy in my price range. However, finding a house rental that allows multiple small dogs plus has a fenced yard and no neighbors seems VERY unlikely for me to find (I cant stand apartments or condos or any city living).

    Although I hate moving, I seem to do nothing but move around a lot despite my best efforts not to. So I think my dream of finding a home to stay in permanently for the rest of my life might just be nothing but a dream. So maybe I should rent instead. IF I am able to sell my home and walk away with $300,000 cash, what should I do next?


    • jlcollinsnh says

      Hi Maia…

      You should also be very careful in trusting the advice of people on line. 😉

      That said, and since you asked, I’ll offer my thoughts.

      You certainly sound like someone who would be happier renting. But given your specifications — dogs and far from neighbors — finding a rental could be tough. So begin your search now in the area you prefer and see just what is available. Renting options are certainly far more plentiful in the city

      Also, be sure your landlord will be willing to respond to your calls for maintenance and repairs. Some who rent houses, especially remote houses, prefer tenants who are willing to do small jobs and routine maintenance as part of the deal.

      I’d combine this rental search with a search for smaller houses to buy. After all, you are looking for the same characteristics in both cases. Plus you might find a house for sale that the owners are willing to rent to you. Selling a house in a remote area can be a long, frustrating process which could mean a more flexible seller for you.

      Either way, take your time.

      I absolutely would sell the house “as is” especially as you have contractors (who could make money fixing it up for you) telling you not to fix it up.

      You could easily budget 50k and find it runs 2-3 times that much. Plus you have the risk of selecting a bad contractor.

      Good luck!

  43. GO4ITUSA says

    My family & I have rented most of our lives but bought current house six years ago. I calculate my return on capital to be about 2.3% and my opportunity cost for our 42% down payment was a stock market that essentially doubled. Ouch. If I started today in a far higher stock market and better opportunity cost comparisons the numbers for owning would probably be more favorable. Despite all of that I really don’t have regret for buying the house. The ability to itemize taxes has been a huge windfall that far exceeds our maintenance costs. If you rent the landlord can up and kick your ass out with a few months notice. Utility costs are a wash though by owning I’m free to install all sorts of cost saving devices. Landlords don’t give a rat’s ass about your operating costs. Owning gave me the ability to tailor our down payment so that we could get our monthly expenditure for mortgage/insurance/taxes exactly where we wanted it to be. As with taxes on a house, rents can fluctuate just as easily (thou never lower) – our house tax actually dropped. If we rented this place instead of owning it our costs would markedly increase – moreso than the 4% withdrawal rule on our initial down payment. After a huge market run up last 6 yrs we’d be slightly ahead on our monthly cash flow had we invested the down payment and withdrawn 4% annually. Each year that goes by as we pay more towards principle our returns on capital should increase. All else being equal I can unequivocally say we’re happier through ownership though as Jim rightly points out there are a ton of variables.

  44. jlcollinsnh says

    Welcome Go4itUSA…

    …and thanks for the analysis of your situation.

    The most important thing is that you are happier owning, and that makes it worthwhile even if it costs a bit more.

    My only quibbles, and they are small, are:

    —While you are certainly right that the market has had a great run over the last 6 years, we can’t assume it won’t continue the same over the next six. Can’t assume it will either. To do so is to engage in the impossible task of market timing, i.e predicting the future.

    —Your ability to itemize taxes (due to your mortgage and RE taxes) is a benefit only to the extent the deduction exceeds the Standard Deduction of $12,600 you would have gotten regardless. Perhaps you have included this in your calculations, but many miss it.

    In any event, enjoy your home!

    • GO4ITUSA says

      Thanks – and hello from the Bahamas! You are correct, I did calculate the tax write-off that was above the standard deduction and as we had a large income during the six years that write-off was significant. I haven’t counted any appreciation in my ROC calculations and I take price quotes on Zillo as only a rough market gauge to see how we’re doing in general. We also had our first born in college at the same time and could itemize some of that (though for most part she put herself through).

      I think that a HUGE key to happiness in ownership stems from the price paid and any capital appreciation. After we bought and sold our first house we rented for the next 18 years as we bounced around the world with the military. My wife and I never thought that the housing market was quite rationally priced and esp our tour in DC the prices even in 1999-2000 seemed obscene. Along comes 2008-2009 and voila! Sanity restored. Finally the cash flow to pricing made sense. I have many friends, many, who bought large homes in that high market and now they’re upside down. Anecdotal evidence is that most of those are not happy at all with owning and now many are so upside down they’re “trapped.” Can’t sell and take a massive loss so stuck in place and can’t seize career opportunities elsewhere etc.

      After having done both owning and renting the absolute #1 advantage to renting I’d say is that it allows you to be extremely adaptable and flexible or to borrow a term from Nassim Taleb – antifragile. There are huge advantages especially for young professionals in maintaining flexibility. And heck, as the wife and I commence with our travel phase we may just one day return to renting and do 90 day rentals abroad – living in exotic places. :-). Absolutely LOVE your blog Jim.

      • jlcollinsnh says

        As I look out my window at this cold, damp NH April day, the Bahamas sounds very nice. 🙂

        Are you vacationing there, or is it your home?

        You have me curious as to your itemized deductions. You mentioned you had a child in college at the time, but while some education expenses can generate a tax credit, none can be used as an itemized deduction.

        The big itemized categories are: taxes, mortgage interest, charitable and medical (tied to a small percentage of your income.

        So typically, unless you have a very large mortgage, high state income/RE taxes and/or generous charitable contributions, it is tough to get far enough beyond the Standard Deduction for itemizing a mortgage/RE taxes to be a great benefit.

        If you are willing to share, I’d be interested in seeing what yours are. If not, no worries, but you might check for yourself.

        Thanks for the kind words on the blog. Glad you enjoy it!

        • GO4ITUSA says

          Unfortunately it’s a vacation and the party must end in two days…. Then back to Virginia. 🙁 You are correct, my bad. Higher Ed costs weren’t itemized…. Off the top of my head (tax records are back home) it was mortgage deduction… Charitable donations to Veterans and old books to our library, long-term care ins (which as I recall was itemized) but I am giving serious thought to canceling that policy… Got it at age 49 (and I’m now 52) so wasn’t prohibitively expensive (a juicy topic for another day)… Medical costs, dental costs, health/dental insurance premiums… Add it all up and my advantage is about $3k over the Standard Deduction give or take. Mortgage isn’t all that big… $150k at 4%

        • GO4ITUSA says

          Also remember that my mortgage is fairly young (6 yrs) so most of it is interest… That will erode over time – unless I refinance…

  45. Go4itusa says

    OK Jim. Back from the Bahamas so I could dig into my records and give you a not so flippant answer. You asked about my tax advantages etc. I flew back to the States on a long weekend from East Europe, found a place in my desired location, distressed seller, and made my move – Call it April 2010. I made him throw in a Tommy Bahama breakfast nook table ($1500 or so) and a bunch of cabinets etc…. as Sun Tzu says – move when the moment is right:

    2010 – Itimezation did not offset standard deduction. $0.00
    2011 – Itemization advantage – $2284
    2012 – Itemization advantage – $5070
    2013 – Itemization advantage – $4263
    2014 – Itemization advantage – $4076
    2015 – Itemization advantage – $4342

    TOTAL: $20,035

    In 2010 there was also a so-called first time homebuyers tax credit ($8000) which no longer exists. I spent about that amount on new appliances and furniture so it’s a wash. How did I get that high above the standard deduction for 5 years? A high income for those five years led to a lot of state taxes (the predominant item) and mortgage interest. I was able to add medical premiums etc. This year we are finally FIRE and I left the rat race so income will drop by about 60% and I’d guess we’ll be using standard deduction.

    The major housing expense thus far has been a new upstairs HVAC – cost (-$4785). Lowers my tax advantage to $15,250. We have not sunk any major money into needless home improvements or anything…

    Home equity appreciation assuming stagnant value = $16,286
    Home equity appreciation using Zillo guesstimate = $43,286

    I well realize there are different methods in calculating returns on “investment” and for the record I don’t view a home as an investment – if it works out then great – I tried to do this rationally to give us a shot at a good outcome but who knows…

    Down payment was $110,000
    Annualized return using stagnant value – 2.33%
    Annualized return using juicy Zillow figure – 5.68%
    Annualized return stagnant + tax advantage – 4.29%
    Annualized return Zillo + tax advantage – 7.36%

    My annualized maintenance costs have hovered around $400-500 other than the HVAC. I will soon have to replace the downstairs HVAC… :-(. Yes – it can gnawl at you… The MAIN advantage in buying (for us) was that I wanted to get the family into a nice place in a nice neighborhood/schools where I could set up my monthly payments at a fairly manageable level for the long haul. If we had rented we’d be in a far different neighborhood (at this current mortgage amount) or I’d be paying a lot more per month to live here and would probably still be working full time. As it turned out, had I left the $110k in the market I would have come out ahead as it stands today but such is life.

    Interested in your thoughts on if my thinking is skewed or my return assumptions are off base. Thanks!

    • jlcollinsnh says

      Welcome Back, Go4itusa!

      Impressive análisis!

      You know, somehow I’ve gotten this reputation of being anti-house. But that’s not how I see it.

      I’m anti- silly people who have bought into the RE industry propaganda that it is always a good investment and who are unwilling or unable to run the numbers and see for themselves and who instead try to justify their purchase with silly notions rather than facts.

      Whew! Got that off my chest. 🙂

      And that’s only looking at it from the financial angle.

      If someone wants a house and says “I wanted to get the family into a nice place in a nice neighborhood/schools…” and that it is just an indulgence they feel is worth spending money on, no more need be said.

      That’s why I owned the houses I owned for 30 years. Just don’t claim it’s a good investment unless you run the numbers and they back that claim up.

      Whew! Looks like there was a little more to get off. 🙂 🙂

      Anyway, you have clearly looked at your own situation, well, clearly. Well done!

      My only question would be, are your “Itemization advantage” numbers the deductible amount over the Standard Deduction or your actual tax savings?

      If the latter, fine. If the former your $20,035 total is only the amount you could deduct, not the amount in taxes saved. As such, it doesn’t make sense to subtract the $4785 HVAC cost from it.

      Rather, you’d need to identify your tax bracket in each year and calculate the amount of tax that extra deduction saved you and total up those numbers for your actual tax savings in dollars.

      Make sense?

      • Go4itusa says

        Not sure I follow (forgive me)… The “itemization advantage” I calculated by subtracting the standard deduction each year from what I actually was able to deduct counting all of my itemizations. So in the first year for example I had to use the standard deduction – no tax savings by owning – 0.00. Every year thereafter I was able to itemize well above the standard deduction – would have been impossible without the house. That $20,035 figure is the sum of only the itemized amount ABOVE and beyond the standard deduction.

      • jlcollinsnh says

        That’s kinda what I figured.

        So, you didn’t save $20,035 in taxes. You were able to deduct an extra $20,035 from your taxable income.

        The savings would have been $20,035 x whatever your tax bracket is. For example: $20,035 x a 25% tax bracket = $5009. That’s the total dollar amount your itemizing saved you over those years.

        And so $5009 is the amount from which you’d subtract the HVAC cost.

        • Go4itusa says

          Ahhhhhhhhhh! Crystal clear! Duh. 28% bracket so $5610. Subtract the HVAC and that leaves $825 which is quickly swallowed by the $400-500 annual crap that comes up. And! Still staring at HVAC #2. I won’t be having itemizations I don’t think this year and perhaps forever more. Soooooooooo I guess I’d better hope that Zillo estimate is in the ballpark! I am hoping that over time my returns improve as the % of equity in each month’s payment increases – now it’s at the rate of $283 per month twds equity and the rest are friction costs…Total Monthly = $1001.

  46. Jay says

    I know it’s an old post but I thank you for it.

    I just ran the numbers based on where we live: (South Australia)
    $15,600/pa Rent VS. $400,000 avg House price = 25.64
    $1,300/mth Rent x 110 = $143,000. No chance we could get a house for that much anytime soon.
    Things may look different in a few years once the property bubble bursts.
    But for the moment, we are very happy renters in a NICE, small house. It’s just nice to see the maths backing us up. (Not to mention not having to pay for repairs, home improvements, council rates and other taxes. Yay!)

  47. Jelena says

    This is probably in idiotic question but I’d love an answer. My husband says buying a house is smarter because once it’s paid for, it’s paid for. Obviously we’d still pay taxes and have to maintain the house, but we’d be spending less in retirement on housing. Am I missing something super simple?

    • jlcollinsnh says

      Hi Jelena…

      What is most likely missing is the opportunity cost of having all that money tied up in the paid for house.

      Run the numbers as described in the post and, if you and your husband are comfortable with the results, keep the house.

      If you are not comfortable with the house, at least you’ll have a clear idea of what owning it truly costs.

  48. Bryan says


    Thank you for all that you do!

    Now that you don’t hold VGSLX, what proxy would you use to calculate opportunity cost?

    Thank you.

  49. Cameron says

    Hi JL,

    I’ve just discovered this (and MMM) and it’s blowing my mind a little. I’ve literally just signed a mortgage on my first home (it passes the numbers, albeit with caveats) but had some questions about your analysis.

    Why do you include heating in the owning numbers but not the renting numbers? If renting you normally (atleast in my experience) have to pay the heating bills yourself.

    If you don’t yet have much capital available is property better for a first investment due to the relative ease of getting a low interest mortgage? To my (limited) knowledge it’s much harder to get say a £100k loan to invest in an index fund compared to a property.

    I’ve also learned after a quick Google that the UK is apparently unique in that Council Tax (our equivalent to real estate tax) is paid by the resident rather than the owner. I’d always thought this was the norm! This definitely tips the scales towards ownership in the UK.


    • jlcollinsnh says

      Hi Cameron…

      My example is just that, you’d want to plug in the appropriate categories and numbers for your situation and location.

      I’m not in favor of debt and that’s one reason owning tends to be an obstacle to reaching FI. Plus the next thing you know you’re buying appliances and furniture and remodeling the kitchen and bath and replacing the roof. 😉

  50. Dave says

    I’ve always thought of a mortgage as a hedge against inflation. In your house rental example above after 10 years the rent would rise to over $40,000/yr assuming it rises with 3% inflation. Also after 10 years you’ll be further down the amortization curve so the interest expense would decrease (and your P&I would stay constant). Of course there are other factors to consider such as the dividends would rise due to compounding and property taxes would also go up along with the home’s value.

    I’ll be FI next year and will be moving to a more desirable part of the country so I’m kind of obsessed with this topic lately. I didn’t even consider renting until I came across Millennial Revolution and this article. The freedom and liquidity renting provides is definitely something that isn’t as easy to put a dollar figure on.

  51. Jorge says

    Thank you very much for your well written and inspiring articles.

    I see that you make several references to Vanguard’s Total Stock Market and REIT funds as your favorite investment vehicles. I would like to suggest that you take a look at Vanguard Consumer Staples (VDC).

    As you probably know, highly savvy investors like Warren Buffet invest mostly in well established consumer staple companies, most of which are part of this index. Take a look at the historical performance and compare it to any of the funds you use. You will be surprised at how stable consumer staples are, compared to the overall market. They are considered defensive stocks because they perform so well in down markets, but the truth is they also outperform most other sectors over long periods of time. Plus their dividends are nothing to sneeze at.

    I also have some other Vanguard funds in our 401ks since they are all I have to choose from, but I will be most likely replacing those once we retire and are able to rollover those funds. I also plan on selling our paid-for house and putting that money to work as you suggest.

    In our IRA accounts I use VDC as our core holding, taking about 60% of our total portfolio. The rest is FDN and BBH. In our taxable accounts I keep 3 years worth of living expenses in VTEB, and about one year living expenses in a high interest checking account.

    One last thing… One of my favorite online tools is the PortfolioVisualizer’s back test (
    I think you will find it very useful as well. You can do back-to-back comparisons of various combinations, accounting for periodic withdrawals, inflation, etc.

    I wish you the best, and again, thank you for sharing your wonderful experiences.

    • GO4ITUSA says

      Your portfolio visualizer is an excellent tool. Thanks for posting. One comment on your consumer staples fund: I’d urge some caution. Although that segment has done remarkably well due to the inherent economics in consumer staples there is no guarantee that it lasts indefinitely. The underlying reason for that segment’s out-performance is pricing power. Yet we have seen that advantage erode – slowly but surely. As for Buffett, it’s noteworthy to see him move the Berkshire portfolio away from the traditional consumer brands in recent years. He has largely jettisoned such staples as PG and JNJ and where he has invested new money he’s piggybacked with 3G Capital on things like Kraft to massively cut overhead and streamline operations to make it more cost competitive with store brands. This recent article gets at the changing market a little bit: With a market index fund, these changes are offset by the gains in the competition. Why introduce that sort of worry when you don’t have to?

      • Jorge says

        Thanks for your reply Go4ItUSA. I agree with your assessment, and I have also observed some of the same issues.

        My main rationale is based on my observation that most of these companies have been around for a very long time, and having gone through more than one severe down-market, they have sustained a fairly steady growth level, and that includes their dividend payouts. These companies sell goods and services that are in steady demand, no matter what the economy is doing. People buy essential items no matter what.

        For added diversification, I like technology and biotech, which FDN and BBH provide, with similarly impressive track records.

        Another thing I like to do is to use the dividends in the Roth accounts (since I won’t need them for a while) to buy individual stocks that I like, and thus make my own sort of fund for extra diversification. Here are some of the stocks I have used for many years to diversify, in small amounts: AMZN, NFLX, MAIN, LMT, MNR, RTN, RAI, ALK, LUV, TMK, JKHY.

        I like things simple, but at the same time, there is no doubt that some sectors provide a superior opportunity for upward movements when held for long periods of time. If you plug in those investments and compare them with a plain vainilla VINIX or VTSAX, the difference in the ending balance is very substantial.

        Of course, if all a person wants is the convenience of easy high dividends without having to sell anything, then something like VGSLX is not a bad option. But when you compare the ending balance between those two options, one will make you dance and the other will make you want to kick yourself. 🙂

      • Jorge says

        I failed to mention in my previous reply, that article is very interesting. Thanks for sharing it, by the way.

        According to the article, the main premise is that the concept of “new and different” has usurped “tried and true”, meaning that many consumers are placing less emphasis on brand loyalty, in favor of value. The thing is, they are still buying comparable products, which the Consumer Staples index should eventually capture.

        I must admit that I don’t particularly like that PG has such a high allocation in the index, but hey, it is hard to argue with their stellar performance over the years, so I’m OK with owning a larger share of that.

        I think your word of caution is wise though, and I appreciate it.

  52. Dom says

    Okay, the message of original article is do the maths, which is definately good advice. I might add- And don’t listen to average/generic advice. The media constantly says get out of debt (as do these FI posts), but this would be the worst thing for me – utter madness. We have a £300k ($400,000ish) interest only mortgage, so I don’t have to pay back the capital until 20 years time. The mortgage interest rate tracks the Bank of England plus 1%, so currently 1.25%. So yes, I’m paying the 1.25%, but everything else (that would otherwise go towards paying off the capital) I’m investing in Index Tracker Stocks & Shares and Peer to Peer (6-10% before tax). I could also take out £30,000 ($35,000) loans at 3%, which could be ‘earning’ me more. So my interest only mortgage with good terms means for me house owning is actually my ticket to FI (albeit slowed down by having four children).

  53. Mighty Investor says

    This one was useful because it combines both the hard math of actual cash flows, but also recognizes the subjective nature of making the decision of rent vs. own. Including the Vanguard REIT in the analysis was a useful twist (as it keeps you allocated to real estate). Thanks for this one. I liked it a lot.

    • jlcollinsnh says


      As I say in my manifesto:

      “Life choices are not always about the money, but you should always be clear about the money choice you are making.”

  54. Suzanne says

    Hi – I just found this website and am really enjoying reading all of the posts. I especially liked this one with the advice to “do the math”. One thing I would like to add into my math is the idea that while house payments stay pretty much the same, rent goes up year after year. I sold my house and became a renter and learned this the hard way after enjoying about a decade of stable housing costs. So how can I factor that into these calculations? Is it something like a rental inflation factor multiplied by the amount of time I will be renting. What exactly would be the equation?

    • jlcollinsnh says

      Hi Suzanne…

      House payments are only one part of the cost of homeownership. Maintenance, repairs, remodeling, utilities, taxes, etc all rise just as rents do.

      So to add this as a meaningful part of the calculation, you have to account for those as well.

      As a proponent of simplicity, it seems to me like way to much extra effort for far to little useful data.

  55. PW says

    I understand Addendum VII but comparing apples to oranges give this article a very lopsided view. You should compare the cost of owning your home to the cost of renting your same home or equivalent (unless that is what you did). I understand that you housing needs are very different now than when you first bought your home, but those without a critical eye could easily be misled by this analysis, especially if they don’t read the addendum.

    • jlcollinsnh says

      You are, of course, free to compare whatever you choose.

      But my advice is to always compare between the actual options you are considering.

  56. MrD says

    There are several other issues not mentioned in this comparison. Owning a house protects you from collectors getting it. Federal government exempts it when they calculate your assets if you ever had to get medicaid or food stamps. You can do whatever you want with your house (make it bigger or build a second house on your property) and stay there as long as you’d like. Once your house is paid off you can live on less income which could qualify you for lower taxes, things like obamacare and even different kinds of debt forgiveness (for example hospitals’ financial assistance cane reduce your bill depending on your income), your kids could get more free college money from the federal government. I would feel better if all of my money was not tied up in financial markets. If our government ever collapses and we experience hyperinflation, your house will still give you a roof over your head while your stocks, bonds and savings could slowly whither away. Owning real estate is simply a good way to diversify your assets. Finally there is a reason why most of Amercans’ wealth is tied up in their houses – majority are simply not disciplined enough.

  57. PJM says

    My wife and I are both 29, been working hard towards financial independence for the last 4 years, and recently paid our primary home off in Southern California. The home is worth about $500k now, and I’ve recently been thinking a lot about the cost of owning the home since it’s paid off. It still costs us roughly $1,000 per month in HOA, property taxes, maintenance, and insurance. I can actually rent the same place for about $2,600 per month.

    When I do the math out load, it looks ludicrous to tie-up $500k and still have to shell out $12,000 per year. If owning a home were an investment (which it’s not), at best, you’d have an expense ratio of 2.4%, 4% front load, and 6% back-end load. Absolute crap.

    “But Pat, you need a place to live!!”

    If my home were listed for rent on Zillow, the ad would read: “FREE HOME FOR RENT IN SOUTHERN CALIFORNIA!!! $500,000 deposit due at the signing PLUS $20,000 to draw up the lease. Ongoing lease maintenance fee of $1,000 per month thereafter. BREAK THE LEASE ANY TIME YOU WANT! Only $30,000 to terminate the lease agreement!! Comes with a community pool, AKA, communal urinal and barbecue area! Driving distance to EVERYTHING! Want to go to the beach!? DRIVE THERE! How about the grocery store? DRIVE THERE! It’s ALL DRIVING DISTANCE! Feel free to paint the walls ANY TIME YOU WANT! This S&*% Hole will look great with a little sweat! Tenant responsible for all utilities and maintenance.

    ……I think we’re going to look start looking for some other options. Thanks Jim.

    Jim – Just read your book a few weeks ago. Fired our financial planner over the weekend. In the process of transferring our funds to Vanguard. Thinking we’ll free up the $500k from the house instead and invest it into VTSAX, assume a 4% safe withdraw rate, and put that towards renting a nice place in the area. I’m certain we’ll come out ahead in the long run and won’t have to participate in this nonsense of trying to time the next housing crash in So Cal.


  58. HomelessInAustin says

    Any opinion on if this math changes in a city that is growing rapidly? Housing prices in Austin are crazy if you get anywhere near downtown. I rent and pay $1700 to have a 10 minute commute (3 miles), and I’m looking to buy a house that is further away (2 more miles, 10 more minutes). Having a short commute is super important to me. I want a new house and a short commute so I know I have to compromise somewhere. The housing price compared to renting price /110 is pretty insane at almost 250. That said it’s a perfect house and I can see myself living there for 10+ years. I have relished having no debt, and this would put me at a DTI of about 0.3 or 0.2 depending on how you calculate it. Any thoughts?

  59. Dustin Stout says

    I’m also a renter, and will only buy something once I’ve achieved FI (if I decide to buy).

    It seems that one thing that’s not included in the initial analysis is that rent goes up (inflation) and owning is a hedge against that. It seems clear that in the first year, renting will almost always have the advantage, but it will lose an edge with each passing year. A good analysis should look at a longer time horizon.

  60. Dave Crausen says

    Hi Jim, I am thinking about this in terms of an upcoming move, so thanks for helping direct my thoughts.

    One thing that I am troubled with: what about the appreciation in the value of your home over time (which is likely to be decent, given you mentioned you are selling at a market bottom)? Admittedly, if you purchase a home and then stay there your whole life, this gain in value doesn’t really benefit you directly. The price appreciation of course is not real money in your pocket, but seems like it should not be discounted, as that makes renting in your scenario above come out way ahead.


  61. TK says

    How is buying a rental property different and more profitable? Aren’t you dealing with the same #s and forces?

    • jlcollinsnh says

      Hi TK

      Thanks for your comment!

      Mr. Collins is currently traveling and unable to respond just now.

      We find for most questions, he has already covered the topic. Using the Search button might very well provide your answer. If not, please post your question again after October 15, 2019.

  62. Michael Nelson says

    Interesting article but I would point out that if people would simply buy less than what they can afford (instead of the amount of loan they qualify for) then home ownership question would probably win out more often than not. I paid 198k for my house 22 years ago(worth 300k today) for a 4 bedroom single family home(loan: 158k paid off after 20 years). Now I pay just $9,000/year in taxes and 5k-7k for everything else. The alternatives would be 2 bedroom apt’s rental cost $1,300/month and 4 bedroom house rent is $2,500/month in Chicago area. I still contributed to 401k and saved separately due to not being over-leveraged on my house and am debt free and FI at 55. I would also point out the authors example: “With $330,000 equity tied up in the house the first and largest expense to consider is “opportunity cost.” – I would argue this is moot point. Most people who buy a home do not have $330,000 until they pay off the loan after 30 years. For myself that paid off the loan and do have $330K tied up in the house…to refinance out and put my $300k in the stock market is not incorporating risk in the equation and renting would simply cost me more.

  63. Captain Greg says

    Where did you get those 2 equations in your postscript? They are essentially the same equation with very different results (in terms of their advice). The second equation could just be rewritten as:

    Monthly rent x 12 x ~9.2 = House price

    And now rearranged:
    => ~9.2 = house price / annual rent

    In this equation, 9.2 is the breaking point between renting and buying. In the first equation the breaking point is essentially double (16-20)!

    So, again, where did these two equations come from? I love what I’ve been reading from your blog, but it concerns me that you didn’t seem to realize that these two equations were actually the exact same with very different results.

    • jlcollinsnh says

      As the postscript says, these are just two of many rules of thumb floating around.

      The fact their results differ is the point.

      My memory is not nearly good enough to recall where I first saw them. But with Google you can very likely find them and more.

  64. Marc Jacob says

    Very detailed computation. Thanks for sharing. My wife and I are planning to buy a house after 9 of years of renting. We are actually eyeing to buy a house at, but after seeing all these computations, I guess we really need to re-assess again our financial capability before taking into the next step.

  65. Mike says

    You are not comparing apples to apples! $330k house does not compare to an apartment. You would have to compare the rent cost of a house that cost $330k in order for this to be a proper comparable. This is like comparing leasing a k car with owning a BMW.
    Your $7k/year on maintenance, repairs and insurance seems high. You must have large property that you pay a landscaper to maintain. If you had to rent a similar property I doubt you would get it for $2000/month. But it all depends on your location. Since property taxes are $8500/year, your location suggests you wouldn’t find a place like that for $2000/month. Landlords bill in all of their costs into the rent.

  66. James says

    All of this is predicated on me being able to put $330k in cash into an ETF. If I only have a deposit (say 20%) then my opportunity cost is much smaller $2,310. So now I’m cash positive on owning the home.. Or Am I missing something here?

  67. Devin says

    Great post. Very insightful. Thanks a lot.

    I disagree about the perceived $5,555 cash flow advantage of owning. Renting gives $11,555 you are making on dividends that you wouldn’t be making owning the house. That $11,555 covers almost half you renting expense lowering it from $24,000 to 12,445. (24,000 – 11,555. to show my work 😉 … And of course $18,000 cost of owning minus $12,445 cost of renting gives you a $5,555 cash flow advantage to renting.


  68. Macharia says

    Reading this in 2021, this is a great and sober analysis. I live in Kenya, where the dynamics are different from the US, here our land/house prices quadruple in value in under 10 years, shorter depending on location.

    When doing this calculation and grappling with the decision, the advise that helped me the most is the idea that, all these models assume proof of life; that we can guarantee our future i.e. we will be alive/have a job/have the physical ability to generate an income.

    So, I opted for home ownership, should anything happen to me-at least the family is settled and secure with a place to call home as they re adjust to the loss of the income I contributed.

    In Kenya with home ownership, you can really slash your running/maintenance costs to just food and basic utilities-that’s the flexibility I’ve seen with ownership vs. rent than with rent where you must have cash flow.

  69. John G says

    Hi JL,

    After reading this, a couple things come to mind regarding the pros and cons of home ownership.

    The pro is that for many, many people having a home mortgage creates a required “built in” savings plan. Having to make the mortgage loan payment every month allows you to also take advantage of the equity build over time. Renting and investing the difference instead, as you pointed out, can outperform home ownership but that only works for the disciplined few who will invest the difference. Many won’t, especially when times get tough.

    The con is the often overlooked maintenance and improvement costs required with home ownership. Putting aside the 2 – 3% of the home value every year for repairs, maintenance and upgrades is often overlooked by homeowners because those expenses are so inconsistent. Failure to put aside these amounts often results in a painful financial awakening when the roof or septic system needs replacing.


  70. Abe says

    Hey! I am here again because a Grumpus Maximus article saying “buying a home is a sure loser” had a link. Good to re-read.

  71. Chelsea says

    My 64 year old mom just sold her house thus finally achieving financial independence. Yay! She wants to rent and not buy a house but is having trouble finding a place to rent because both her and her husband (also retired) don’t have “verifiable income” other than social security and small pension. Although she has plenty of money to cover rent for the next 30 years, how does she prove to rental agencies and landlords that she has the money to rent? I’m sure she can’t be the only retired person to come across this issue. Anyone have any suggestions?

    • jlcollinsnh says

      Hi Chelsea…

      My wife and I faced exactly this situation when we sold our home and started renting.

      Landlords seem to have very little experience with people who are FI and living off their portfolios.

      The solution was to explain that we were wealthy and had the resources to easily pay the rent from assets. This required explaining a bit about the 4% rule.

      Once they understood that, the question was “how much in assets do you need to know we have to meet your minimum income requirements?”

      Once they gave us that number, I had Vanguard send a letter verifying that we had at least that amount. I did NOT have Vanguard send a letter telling them the total of what we have as that is none of their business.

      Not all landlords will be smart enough to look at their income requirements in this way, but some are. Those are also the ones able to see the value of a tenant like your mom.

      Good luck to you both.

  72. Nick says

    If a house appreciates, when and if can you realize those gains? Let’s say the house you bought in 2010 has doubled in value. If you sold and upgraded to a house in the same area or an area that has also had a real estate boom, wouldn’t you be exchanging inflated capital appreciation for the commensurately inflated price of a new house? You would have to sell and become a renter, arbitrage the profit into a lower cost of living area (which may be a less desirable place to live), or have forced appreciation through upgrades that increased the homes value relative to the entire market.

    I don’t know if this question/observation is obvious, but having been a renter I am envious of the houses in my market that were bought ten years ago for $200k and selling today for $500k+. I was renting cheaply and investing the difference the entire time, so all is not lost.

  73. Jessie says

    These numbers are solid. I appreciate that you took into consideration the opportunity cost, or alternatively considering the rent savings as an “investment return”. These makes so much more sense than the average opinion of “my mortgage payment is more than rent”, which seems to ignore the property itself.

    However I’d like to point out that in some countries (I’m in Canada), rent is not tax deductible, and capital gains are taxed up to 25%. So there is also some benefit in parking your cash in a home versus investing in the stock market, and use the after-tax return to pay rent. In your example, the annual premium of living in a house/rent = $5,500/$24,000 which is pretty close to 25%, which makes the actual premium of ownership negligible.

    Still, thanks for providing a great template to properly do the math!

  74. Alex says

    appreciation was not covered in post. 10.03%/y in WA for last 10 years. Great number. It is shame it is not included into calculation.

    • michael says

      i was thinking the same too….real estate in certain markets like WA has been steadily appreciating at 8-10+% even now in 2023.

      If we factor appreciation then real estate is a clear winner. what am i missing?

  75. Kevin Torrence says

    This renting vs owning argument seems to never compare apples to apples. Of course you can find somewhere cheaper, a lot cheaper in fact, than owning a home. But no sensible landlord is going to rent out their property cheaper than it cost them to own and maintain it, period. You only save money by downgrading your living conditions. So, why do the pro-renters always stop at renting a house or an apartment? Why not say it’s cheaper to live in your car? Or rent a room from a friend or family member? Or better yet, stay at a homeless shelter. You definitely could save a whole lot more money that way. While we’re at it, let’s also discuss eating of the value menu vs. a nice restaurant. That over time also is an opportunity cost.

  76. Michael Dean says

    not sure these comparisons are apples to apples

    1) Home ownership comes with lot more space that 1500 square foot apartment…you cannot put a value on quality of ownership. This is not a numbers issue if you look at from quality of life.
    2) and in all the posts I read does appear the analysis takes into account that on a month mortgage payment you are effectively investing because part of payment goes into principal reduction which you never get from renting. And if you want a return, just increase amount you are paying principal every month. Own the home over a number of years and home ownership by and large has been shown to hold its value, thus principal reduction in your payments stick to you versus rent where you flush that money away to the landlord.

  77. Kasey says

    Mr. Karsten from doesn’t agree with you JL. I tried to argue w/ him but for being an ex-FED he can be really egocentric and full of himself with all that complicated math he does to feel above everyone else. And guess what, a convicted homeowner who trashes renters like us.
    I mentioned I was a millennial-revolution follower and he laughed at me and treated me really bad for opposing his ideas. I thought I had to share this with your audience to pick better who represents the FIRE movement. He’s not one that should be entitled with that.

  78. Harvey says

    Thanks for the insightful post and framework. I especially like the opportunity cost analysis, which I think most overlook. Real estate is very situational, property specific and is highly influenced by local home valuation vs. rental market dynamics.

    Recently, I did a cost analysis comparing recent homeowner recurring costs for mortgage rate scenarios of 4%, 5%, and 6.7% for a $467K home with a 30-year fixed mortgage balance of $374K vs. annual rental costs of $23K. In today’s environment, the recurring (not upfront) cost of owning a home is now 1.6-1.8X more expensive than renting on an annualized, short-term basis. Also, your recurring costs (maintenance, property tax and utilities) is almost the same as your mortgage payment!

    If you or your readers are interested in checking out my analysis, please feel free to check out the analysis below:


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