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I Just Sold My Home of 21 Years—Should I Have Rented Instead?

A passionate debate rages about whether it’s better to buy or rent a home. Homeowners argue they save vast amounts on rents and taxes. Renters maintain that they earn much more by investing in stocks instead of houses.

The buy vs. rent debate would benefit if more owners and renters disclosed their actual returns. So today I’m providing hard numbers about the home I bought in 1993 and sold last month.

Obviously, one owner’s past experience is no guaranty of your own future results. But I believe that reading real life case studies can help anyone who faces the buy vs. rent decision.

Besides, I’m curious about whether buying my home was a smart choice. Could I have earned higher profits by leasing a similar place and investing whatever house payments I saved? Who would have fared better: owner-me or renter-me?

My answer to these questions appears below in three short charts. This brief accounting tells a story that I hope you’ll find helpful. It also highlights an important point that’s missing from many buy-rent debates—and it’s a point that everyone should consider before they ever sign a mortgage or lease.

HOME OWNERSHIP GAINS/LOSSES

Chart 1 shows the returns from the house I bought on September 24, 1993 for $215,000 (with closing costs of $2,567) and sold on February 25, 2015 for $419,100 (with closing costs of $15,322). This chart also shows what I actually spent over the years for interest, county real estate taxes, insurance, and repairs (after netting out income tax deductions).

If any item appears in red, click on it to see the supporting data. For example, if you want to explore how much I spent in home repairs over the years, click on the red text in line 8.

CHART 1
$217,567.50 Invested in Home
1 Gross Proceeds from House Sold on 2/25/2015 $419,100.00
2 Closing Costs for Selling House ($15,322.25)
3 Net Proceeds $403,777.75
4 Principal Investment (including closing costs) ($217,567.50)
5 Taxable Gains $186,210.25
6 Blended 2015 Capital Gains Tax at 19.63% and 24.63% $0.00
7 Post-tax Gains $186,210.25
8 Interest/County Taxes/Insurance/Repairs (after deductions) ($169,163.43)
9 Net Gain from Owning $17,046.81

As Chart 1 shows, buying my home allowed me to live there rent-free for 21 years. After counting all the ownership costs, I even managed to earn a small profit. As I see it, this positive outcome is the result of three key factors.

First, in 2003 I paid off my mortgage. I figure this early payoff saved me $101,967 in additional interest expenses. Here’s the math. Without these savings, my home would have lost money over the past 21 years.

Second, I stayed in one place and didn’t move. I figure this saved me about $57,000. According to studies, the average single family home in Colorado changes hands once every 8.9 years. By staying put, I saved myself at least two rounds of broker fees, moving expenses, and closing costs. Here’s the math.

Third, I benefited from tax policies that favor homeowners. I figure these saved me $91,956. As line 6 shows, the tax code exempts me from paying for any gains on the home sale. See IRS Publication 523. This saved me $36,553 in capital gains taxes ($186,210.25 * 19.53% = $36,553).* As line 8 shows, I also received income tax deductions for payments of mortgage interest and county real estate assessments. This saved me $55,403. Here’s the math.

Thanks to the foregoing, owner-me did just fine. How would renter-me have fared?

RENTAL GAINS/LOSSES

Chart 2 shows the results if renter-me had regularly invested owner-me’s house payments of $217,567 into the Vanguard 500 Index Fund (symbol: VFINX). My house payments consisted of: (1) a down payment when I bought the house in 1993; (2) a final payoff when I retired the mortgage in 2003; and (3) monthly mortgage payments made between 1993 and 2003, a small portion of which were allocated to principal rather than interest. As to these monthly principal payments, I assume that renter-me would have accrued the savings and invested them annually in VFINX (assuming annual instead of monthly investments greatly simplifies my calculations). Finally, I assume that renter-me would have sold VFINX on February 25, 2015, which is the same day I sold my house.

Chart 2 also reports how much it would have cost renter-me to live in a comparable house. I calculate this amount based upon: (1) Zillow.com’s report of current rents for similar homes in my neighborhood; and (2) well-established formulas for charging rent that are based upon a percentage of the rental property’s value (as rental home values increase, so do rents).

CHART 2
$217,567.50 Invested in Stock Market
1 Gross Proceeds from VFINX Sold on 2/25/2015 $886,260.99
2 Closing Costs for Selling (and Buying) VFINX $0.00
3 Net Proceeds $886,260.99
4 Principal Investment ($217,567.50)
5 Taxable Gains $668,693.49
6 Blended 2015 Capital Gains Tax at 19.63% and 24.63% ($141,456.71)
7 Post-Tax Gains $527,236.78
8 Rent Expense for Similar Home ($624,703.87)
9 Net Loss from Renting ($97,467.09)

As Chart 2 shows, renting a house for 21 years would have caused a loss of $97,467.** Why the shortfall? Answer: $624,703 in rents wipes out the $527,236 I would have earned in investment gains.

Charts 1 and 2 show that by owning instead of renting I saved $114,513 ($17,046.81 – ($97,467.09) = $114,513.90). But this doesn’t tell the whole story of how much I prospered as a homeowner. One big point remains to be considered, and it’s a point that many buy-rent debaters forget to mention. So let’s look at one last chart.

INVESTING WHAT I SAVED ON RENT

Compare line 8 of both charts above, and you’ll see the enormous costs of renting. Over 21 years, renter-me pays $624,703. Over the same period, owner-me also pays recurring costs, which consist of interest, county taxes, insurance, and repairs. Together, these ownership costs equal $169,163—a small fraction of what renter-me incurs. My savings on rent thus total a staggering $455,540 ($624,703 – $169,163 = $455,540).

Now here’s the big point missing from many buy-rent debates.

Since owning my home produced rental savings of $455,540, how much could I have earned if I’d invested it all in VFINX? After all, if renter-me gets to invest any saved house payments as they accrue, then owner-me should be free to invest any accrued rent savings.

Chart 3 reports how much I would have earned had I used my saved rents to buy stocks. As before, I assume that owner-me would have accrued the monthly rental savings and used them to make annual purchases of VFINX.

CHART 3
$455,540.44 in Rent Savings Invested in Stock Market
1 Gross Proceeds from VFINX Sold on 2/25/2015 $1,064,007.93
2 Principal Investment ($455,540.44)
3 Taxable Gains $608,467.49
4 Blended 2015 Capital Gains Tax at 19.63% and 24.63% ($127,046.61)
5 Post-Tax Gains $481,420.88

Chart 3 delivers an amazing lesson. By regularly investing what I saved in rents, I eventually enjoy post-tax profits of $481,420—a massive return that builds on the $114,513 ownership advantage reported in Charts 1-2.

Chart 3’s lesson is missed by many, but if you remember to pay it heed, someday owner-you may be sending renter-you a heartfelt message of thanks.

*   *   *

If you want to explore this topic further, visit the New York Times buy-rent calculator. This site allows you to input twenty-one different variables, a detailed approach that delivers good advice tailored to your own circumstances.

* For married couples filing jointly, the 2015 federal capital gains rate is 15% on amounts up to $464,850 and 20% thereafter. Colorado adds 4.63% to these federal rates.

** This loss is slightly understated. In line 6, I assume that all stock market gains would have been taxed at the 2015 capital gains rates for married couples filing jointly. In reality, any gains from VFINX quarterly dividends would have been treated as current income and taxed at the higher marginal rates that applied during my working years (I retired in 2009).

Great Photo by WoodleyWonderWorks

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11 Responses to I Just Sold My Home of 21 Years—Should I Have Rented Instead?

  1. D March 23, 2015 at 6:01 AM #

    Owner-me neglects the recurring, irregular costs of maintenance and repairs.

    • A Noonan Moose March 23, 2015 at 7:58 AM #

      D: I fear your comment is a bit ambiguous.

      If “owner-me” refers to A Noonan Moose, please be aware that my annual totals for repairs can be seen by clicking on the red text that appears in Chart 1, Line 8. This takes you to a spreadsheet which reports, in part, that over the course of 21 years owner-me spent a total of $70,423.43 on repairs (additionally, I report my sub-totals for each year). So there is no “neglect[ ]” to account for my repair costs.

      If “owner-me” refers to you, D, and is meant to convey that you are neglecting your house repairs, then I can fully sympathize. Later today I’m heading out to the Habitat for Humanity Restore to look for some replacement parts on a canister down light that’s been broken for weeks!

      Thanks very much for your comment! 🙂

  2. Andy Volin March 23, 2015 at 7:33 AM #

    This is the best analysis I have ever seen of the rent vs. buy issue. Everyone’s situation is unique because of price points, neighborhood, and timing, right? Your data collection to support this analysis is impressive as well.

    • A Noonan Moose March 23, 2015 at 8:19 AM #

      Andy:

      Thanks so much for your kind words. You’re correct that each person’s situation will be unique and that many different factors will play a role. For example, in my particular case, home ownership proved to be a winning proposition in large part because I was able to pay off my mortgage early. This single factor contributed $101,967 of the $455,540 in savings that owner-me had available for investment in VFINX (see Chart 3).

  3. Gary @ Super Saving TIps March 24, 2015 at 2:12 PM #

    Rent versus buy is an important debate and while everyone’s situation is different, it’s always good to see the data. Glad to see that your decision was a profitable one!
    Gary @ Super Saving TIps recently posted…How to Teach Your Kids About MoneyMy Profile

    • A Noonan Moose March 24, 2015 at 6:45 PM #

      Thanks for stopping in Gary! I agree with you about the importance of the buy vs. rent debate—few financial decisions involve so much complexity and so many dollars.

  4. J. Money March 24, 2015 at 2:49 PM #

    Fun one man 🙂 Real numbers is ALWAYS helpful to see!

    I’ll admit I thought you missed the line item for maintenance over all those 21 years too, but then saw your comment up above.. might be worth highlighting more in case others are also missing it?

    Interesting read for sure.
    J. Money recently posted…The 15 Minute Trick to Getting Stuff DoneMy Profile

    • A Noonan Moose March 24, 2015 at 6:47 PM #

      Thanks for dropping by J$. I’ll add in the highlight you suggest!

  5. No More Waffles March 30, 2015 at 12:29 PM #

    Noonan,

    Excellent explanation – one of the only ones I’ve come across thusfar.

    As I’m looking to buy a house in the immediate future, I’ve been doing the math too if renting or buying is the best option over the long-run. It’s counterintuitive but not owning my own home is the best option financially speaking because my monthly rent payments are so low.

    Did you take into consideration the time-value of money?

    Cheers,
    NMW
    No More Waffles recently posted…Munich RE (MUV2) Stock Analysis: An Assured Dividend PaymentMy Profile

    • A Noonan Moose March 31, 2015 at 9:10 AM #

      You make an excellent point that any individual’s answer to the buy vs. rent issue will depend upon his or her own particular circumstances. In your specific case, the local market for rental rates is low enough to direct you into a lease instead of a mortgage. That clearly wasn’t the case for me over the past 21 years here in Colorado because the total costs of rents ($624,703) so greatly exceeded my ownership carrying costs for interest-taxes-insurance-repairs ($169,163).

      I didn’t take into consideration the time-value of money. Here’s why. The time-value approach is “used to make comparisons between cash flows that don’t occur at simultaneous times.” See Wikipedia article here. In this particular post, there was no need for a time-value calculation since I assumed that each investment by renter-me in VFINX would have been made at the same time that owner-me was making a payment on the house. In an accounting sense, this produced a direct “apples-to-apples” comparison of the profits I received from home ownership versus the profits I would have received from investing in stocks.

      Thanks for stopping in NMW!

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