Potato’s ‘Rent vs Buy Investment Spreadsheet’

Take a look at this very elegant Rent vs Own comparison spreadsheet/calculator.
Thanks to ‘Potato’ for telling us about the sheet and hinting to link it.
Potato also has a page of discussion regarding the calculator at their blog ‘Blessed by the Potato’. Wise-words excerpt-
“There are a lot of assumptions and estimates involved, a lot. The question is what should you do for your life? And importantly, what are the consequences of being wrong? Don’t use this tool with unrealistic estimates to try to justify a decision you want to make, but rather try to use it to help you come to the decision you should make — and to see what happens if you’re wrong.”

23 responses to “Potato’s ‘Rent vs Buy Investment Spreadsheet’

  1. good luck with that perpetual 7% investment return on the renters nestegg

    • Yes, if one could get that reliably under current interest rate conditions you’d have to be skilled and/or fortunate. Note, of course, that the spreadsheet is designed to be used by you with all of your own custom estimates.
      As ‘Potato’ says, “Don’t use this tool with unrealistic estimates”.
      That goes for owners and for renters.

      It’s greatly about ones market outlook, isn’t it?

    • 7% would be skillful in this environment, but 5% is reasonably easy.

  2. I know I’m beating a dead horse but the buy vs rent calculator makes a ton of assumptions and misses long-tail risks associated with holding a relatively illiquid and potentially volatile asset. To avoid all the intricacies of buy vs rent, just do a simple price-monthly-rent ratio calculation and refuse to pay more than multiples of 100-150 depending upon future density increases.

    If you want to start adding in intangibles and premiums based on your own personal situation, why even bother with the spreadsheet in the first place?

    http://housing-analysis.blogspot.com/2011/05/buy-vs-rent-pet-peeve.html

    • Points taken, jesse.

      From jesse’s article:
      “The online calculators can only provide part of the information required to make a proper financial buy-vs-rent decision and should be used with caution.”

    • It’s very simple:

      “To avoid all the intricacies of buy vs rent, just do a simple price-monthly-rent ratio calculation and refuse to pay more than multiples of 100-150 depending upon future density increases.”

      Except that it isn’t.

      If you used this ‘calculator’ you would have missed upwards of 100x capital gains over the last 6-8 years (this calculator did work in 1995-2003 era, though). Not to mention compressed mortgage repayment due to historically low interest rates.

      Sometimes, the long-tail risks are to the upside folks.

      • “Sometimes, the long-tail risks are to the upside folks.”

        “Upside risk” is still a risk, meaning loss of capital. A capital gain is not a risk in the pure sense.

        We should be honest with what a “buy vs rent” calculator is. If people are going to assume whatever appreciation they want based on various durations of historical trends, this spreadsheet has close to zero “value”, other than fulfilling confirmation bias.

  3. I think it’s important to recognize that the tail risk for Vancouver is that RE prices keep going up. The biggest risk for buyers right now is the normal and inevitable reversion to the mean based on every asset price cycle in history. Granted, these are not normal times and according to eastern conventional investment wisdom for the new normal (as explained to me), real estate returns are negatively correlated to equity price returns (regardless of either market’s fundamentals).

    Apparently a 60% drop in Chinese stock indicies is enough to begin the new trend viewing recent Chinese real estate price decreases. Given the amount of leverage employed in Chinese investment real estate (and real estate in general), I wonder how massive the negative RE returns will be if this negative correlation holds going forward. I would imagine that negative 150% is a real possibility based on a 30% stock market increase?

  4. where is the “provide stable, secure home for family” in this calculation? Spreadsheet is toilet paper if it doesn’t include the most important reason for buying.

    • Because renting is like living under a bridge, right?

    • “Spreadsheet is toilet paper if it doesn’t include the most important reason for buying”

      Agreed but this cannot be said about investors. But there will always be owner-occupiers to sell to so it’s all good.

    • i’m a big spreadsheet person but never thought to use as tp. is it good?

    • Neither is “can paint every room pink and knock down walls” but then again, I don’t see “can move to another house, neighborhood or city at a moment’s notice”.

      If your ‘most important reason’ is worth 100K, and that’s more than the additional cost of buying vs. renting is, then spreadsheet helps inform your decision.

      Hate to try to use a spreadsheet (on Google Docs, saved in the cloud) as toilet paper though.

  5. on the mark – focus on big factors. 1st, house (a cost) not home. 2nd, net rental yield > alternate investment yields – assign premium to address risk of being less liquid. still, must decide with clear head which aspects of current trends will continue or revert. maybe 10% of prospective buyers get this far? it’s pinochio’s world.

    just running over dead horse with tractor now. how about something new? rd and i noted success of city states like sg and hk, where they have very strong, unbubbly (boom/bust yes, but bubble no) economies, without any natural wealth. it’s low tax/tariff rates, strong ppty laws and location, imo. otherwise, there would not be much of a reason for anyone to be there. so, just as investors and business there are attracted to low tax rates and less govt interference, the high cdn tax rates are also a factor pushing people into house investments, where 1st residence profits are sheltered. the differential is higher than in the us, where prevailing tax rates are lower and 1st residence profits are only tax-exempt up to 250k per person.

    why create value and have it taxed heavily when you can co-opt other people’s money to speculate while avoiding a very large chunk of the tax load? heavy-handed govt policy has all sorts of unintended consequences. more of it in another form cannot be the solution. there will be inequalities in a freer society, perhaps very large ones. but as long as those are primarily merit-based, it is about as good as it gets. the big socialist experiments last century already showed that legislating more wealth equality just leads to everyone being poorer.

  6. apparently home owners cannot have investment portfolios, I wasn’t aware…

    • My tenants are feeding my investment accounts but I am just a Van Duper, so don’t listen to me.

    • I was about to comment on the exact same thing. That bias alone makes the spreadsheet worthless. Also it assumes that the game ends after 30 years, when the homeowner has a place to live for “free” and the renter is still renting.

    • nuxfan, blammo, Anonymouse -> You all appear to be confused. Of course home owners, and renters, can have other assets and other funds that they invest (and, like blammo, they may choose to invest them in RE). But those additional funds are neither here nor there… spreadsheets like the one above simply aim to look at the different outcomes regarding funds spent on ones own housing.

    • BTW, when I said “neither here not there”, that is not completely reflective of my beliefs: As I have stated repeatedly elsewhere, it’d be acceptable for any prospective buyer to go ahead and buy a home in Vancouver if the cost of that principle residence then makes up a minority of their net-worth… say 35% or less. Thus, when the cost of that home drops by 50%, the ‘hit’ they take will only be 17.5% of their net-worth. Painful, but not catastrophic.
      Compare that outcome with the one in store for those who have >100% of their net-worth in their homes (many, many Vancouverites).

  7. Huh? You plug in whatever values you feel are appropriate for house appreciation. If you’re wrong about that, you’re wrong. In the last 6-8 years, houses in Vancouver have obviously appreciated by more than 2% a year. Going forward, though?

    Similarly, you pick the likely path forward for interest rates and inflation. What’s that going to look like? I don’t know any better than anyone else, but if I’m assuming a half million dollars (this used to be a large sum of money, you know) debt, I’m going to make some pretty conservative assumptions (like interest rates being higher in 5 years time). Or you could use it to ‘stress test’ by exploring different values and seeing how much trouble (or how much winning) you could find yourself in.

    The calculator is fine.

  8. nuxfan, blammo, Anonymouse: To clarify, if the person doing this analysis has an investment portfolio, they would have the exactly same amount of additional money available to invest in that portfolio and exactly the same investment options in both scenarios. For example, say for a given year the total cost of buying is $2000 a month, and the cost of renting is $1500; if the person doing the analysis has $2500 a month left over after all their expenses, the renting scenario would have an investment portfolio of $500, and the buying scenario would have _the same_ investment portfolio of $500, plus another portfolio of $500. Since what the spreadsheet measures is the difference between the two scenarios, the returns on that investment porfolio drop out. The same way that the spreadsheet doesn’t count your living expenses in the bought versus rented place – It implicitly assumes you’re looking to buy or to rent the same type of place and that your living costs would be the same.

  9. What I just wrote assumes the person doing the analysis is choosing to buy versus rent the exact same house. Given that isn’t usually an option, and the person doing the analysis may be deciding between renting close to work and buying in the suburbs (or vice-versa) I’ve added a simple way to add different costs of living in the version of the spreadsheet that I created here:

    https://docs.google.com/spreadsheet/ccc?key=0AgF-ddPb2c6pdGZ2amdGWUtoNGw0aFZ4N0dzcHBKY3c
    (potato didn’t set permissions to allow me to work on the version linked in the post)

    Some examples of why the cost of living could be higher in one scenario versus the other would be: food is more expensive in that part of town, the commute is longer, getting around by car vs. public transit vs. bike vs. walk, etc.

    note: the way that I implemented this in the spreadsheet implicitly assumes after spending the inputted cost of living and the calculated cost of housing (including ‘invested excess’), any additional income is invested or borrowed at the same rate of borrowing/rate of return in both the buying and renting scenario.

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