This analytical model was developed in connection with the personal finance bestseller, *Get a Financial Life*, and is available through my Spreadsheets page.

BUY-RENT.ODS automatically calculates the advantage (or disadvantage) of buying vs. renting a home. Just fill in your values for the 20 parameters (Rent, Price of Home, Loan Amount, Interest Rate, Tax Rate, Appreciation Rate, etc.) and read the result. The spreadsheet tells you whether it is better to buy or rent, as well as the final difference in cost between buying and renting. Also included is a loan amortization table you can use to look up the monthly interest payment, principal payment and remaining mortgage balance of your loan. Unlike most calculators, you can view the annual cash flows **and** their underlying formulas.

It is better to BUY. |

RENTING would cost $10,354 more. |

Annual Apartment Rent and Utilities |
$9,600 | Purchase Year | 2003 |

Rate of Return on Invested Funds |
5.00% | (change Purchase Year before Tax Rates) | |

Inflation Rate | 3.00% | ||

Purchase Price of Home | $100,000 | ||

Home Appreciation Rate | 4.00% | ||

Holding Period in Years | 5 | ||

Loan Amount | $80,000 | ||

Loan Term in Years | 30 | ||

Points | 0.50% | ||

Interest Rate | 5.75% | ||

Marginal Federal Tax Rate | Enter | Tax Rates | |

Standard Tax Deduction | $7,950 | 2003 | 27.0% |

Itemized Tax Deductions Not Related to this Property |
$1,000 | 2004 | 26.0% |

Property Tax Associated with Owning the House |
$1,100 | 2005 | 26.0% |

Closing Costs Other Than Points |
$4,000 | 2006 | 25.0% |

Annual Cost of Utilities Associated With Home Ownership |
$1,800 | ||

Annual Home Maintenance Cost |
$1,250 | ||

Annual Home Insurance Cost |
$500 | ||

Cost of Selling the Home |
5.00% | ||

Future Value (FV) or Present Value (PV) Analysis |
FV |

**FACTORS AFFECTING THE BUY VERSUS RENT ANALYSIS**

**Annual Apartment Rent and Utilities**

Assuming that you will rent, estimate how much you will spend on rent and utilities in the first year.

**Rate of Return on Invested Funds**

If you rent, you will be able to invest the money you would have used to buy. Estimate your expected annual rate of return on such an investment, and enter the result as a decimal (for example, 5% should be entered as .05).

**Inflation Rate**

Estimate the average annual rate of inflation over the next thirty years. Many people use 3% for this parameter. Enter your estimate as a decimal (3% = .03).

**Purchase Price of Home**

This is the “sticker price” of the home. It does not include closing costs and points.

**Home Appreciation Rate**

Estimate how much you expect the price of the home to rise each year. Enter the result as a percentage in decimal form (4% = .04). Use a negative sign if you expect the price of the home to fall.

**Holding Period in Years**

For how many years do you expect to own the home?

**Loan Amount**

In other words, the size of your mortgage.

**Loan Term in Years**

This needs to be at least as long as the Holding Period, but cannot exceed 30 years.

**Points**

If you purchase a home, you will have to pay a percentage of the loan amount (called “points”) as part of the closing costs. Enter the number of points expressed as a percentage of the loan amount in decimal form (0.50% = .005).

**Interest Rate**

Fill in the interest rate of your mortgage in decimal form (5.75% = .0575). The calculation assumes a fixed-rate mortgage because the fluctuations in an adjustable-rate mortgage are hard to predict.

**Marginal Federal Tax Rate**

Your marginal tax rate is the percentage of an additional dollar of income that is paid as tax. In 2003, there are six marginal tax brackets. Consult a current tax guide to find your marginal tax rate. Enter the result as a percentage in decimal form (27% = .27).

**Standard Tax Deduction**

In 2003, this is $4,750 for single taxpayers and $7,950 for married taxpayers filing joint returns. The standard deduction goes up slightly each year.

**Itemized Tax Deductions Not Related to this Property**

Add up all your itemized tax deductions that are not related to the property in question (i.e., leave out mortgage interest, property taxes, and points that are entered elsewhere in this spreadsheet). Itemized tax deductions include state income taxes, medical expenses in excess of 7.5% of your income, charitable contributions, and certain other expenses (see a tax guide for details).

**Property Tax Associated with Owning the House**

Estimate the annual property tax on the home in the year when you would purchase.

**Closing Costs Other Than Points**

When you purchase a home you must pay closing costs in addition to the points. Fill in the amount of these additional closing costs.

**Annual Cost of Utilities Associated With Home Ownership**

Estimate the cost of utilities in the first year of home ownership.

**Annual Home Maintenance Cost**

Estimate the average annual cost of repairs and maintenance for the home that you might purchase.

**Annual Home Insurance Cost**

Estimate the cost of insurance in the first year of ownership for the home that you might purchase.

**Cost of Selling the Home**

Estimate the cost (as a percentage of selling price) that you will incur when you sell the home at the end of the holding period. Enter the result as a percentage in decimal form (5% = .05).

**Future Value (FV) or Present Value (PV) Analysis**

Future Value analysis compounds the after-tax Rate of Return on Invested Funds from the year costs are incurred to the end of the holding period (future), obtaining a factor to be applied to the year’s costs. This was used in Get a Financial Life. Present Value analysis discounts a year’s costs back to the beginning (present). Should You Buy Or Rent Your Home? uses the latter approach.