Is It Better to Rent or Buy: Cool New Calculator from the New York Times

I rent a house in Key West for $1,900 a month. Before I show you a calculator which tells me to always rent this home for the next 30 years instead of buying, let me make a few points about this place:

• This house (really a one bedroom cottage) is in a very quiet compound of three houses behind a gated wall. All three houses have access to a community pool.
• This house has a washer/dryer on premises on a deck out back. Alone, my girlfriend and I are saving about $100.00 monthly in former laundromat fees. Also, we save on time and gas expense for the car needed to transport the wash to the Laundromat.
• The lights to the pool are tacked onto our electrical bill and although we've put the lights on a timer, our landlord still allows us to subtract $75 a month from our $1900 rent for the electricity which we feed the pool lights at probably $25 a month. So, in essence, our rent is really $1850 per month.
• This house is located close to the top of Solares Hill. Should we have flooding again in Key West due to hurricanes, we will not need to worry about our car being destroyed. Hence, we are keeping the high deductible which lowers our insurance. Also, renter's insurance is lower.
• Since we now live one block from Duval Street, I can now walk to and from work. I save the $10 in former parking fees which I used to pay four times weekly. Thus, another $160 to $180 a month is saved by this convenience.
• Lastly, we pay no insurance or taxes on this place. All maintenance is performed by a cool maintenance man hired by my landlord.

Now the reason I'm telling you all this is so you will have an understanding of how I and my girlfriend are living in a millionaire's home on blue collar money.

We don't buy new cars. We don't buy frivolous cosmetic junk like tattoos, liposuction, fake tits, and body piercings to set ourselves apart as "different" or feel better about ourselves.

We also live below our means when it comes to necessities such as purchases of bottled water (I'll post later about how I save at least another $200 to $300 a month on water purchases).

So, why are a couple of savers with no debt not buying a home in Key West when the Key West Real Estate Cartel keeps telling us "There's never been a better time to BUY Real Estate!"?

We did the math.

Actually, I did the math on a legal pad before we rented out this place and there was no way we could lose by renting.

And now, I've finally found an outstanding rent vs. buy calculator for Housing which is better than my legal pad and trusty Texas Instruments calculator.

Here are the parameters I set for the calculator and my reasons why:

1. We set my rent for $1850
2. We set the asking price for this house (on the market now) at $1.4 million.
3. We set the annual appreciation for the next 30 years at a very aggressive and conservative (in my mind) 4% per year. (This is close to the historical norm for the last 100 years in national real estate, but my feelings are American Real Estate will deflate for the next 10 to 20 years as it did in Japan.)
4. I have no idea what the current property taxes for Monroe County and Key West are at, so I am using the 1.35% preset on the NY Times Calculator. This sounds high to me, but if any of you have knowledge about the real rate of taxation for Real Estate, please let me know.
5. Lastly, I have excellent credit, but I still cannot afford a 10% downpayment on a $1.4 million home. I could do 5% for a downpayment, or about $70,000. Knowing that smaller downpayments mean a higher set interest rate, I've assigned a 7.25% mortgage rate to myself . . . which might be a lowball figure considering the fallout in sub-prime lending is now hitting Alt-A and Prime lenders.

So, basically I am being very conservative in all my picks on this calculator.

And for those of you who feel Key West Real Estate will continue to multiply annually by double digits just as soon as the "bottom" is found in pricing, I've got news for you: if Key West simply multiplied home prices by 10% annually for the next thirty years . . .this house I live in would double in price over 4 more times between now and 2037.

Using the Law of 72 which says Annualized percentage gains which add up to 72 will give you a double in price, we can find that the cost of this house should be the following in 2037.

• By 2014 we should see a price tag of $2.8 million on this home I rent.
• By 2021 we should see a price tag of $5.6 million on this home I rent.
• By 2028 we should see a price tag of $11.2 million on this home I rent.
• By 2035, we should see a price tag of $22.4 million on this home I rent.

Give or take a few hundred thousand dollars, but using local Real Estate Cartel cheerleader drivel, the Chuckleheads who are part of the cartel are still telling anyone who will listen that Real Estate is a sure fire bet which always goes up.

Now again, keep in mind the above math is done if Real Estate takes off again in Key West at a much slower 10% annual gain than the 30% and 40% gains we saw year over year during the Mad Buying Panic from 2000 to the middle of 2005.

Please note: there are actually builders and Realtors as customers in the bar I work who feel certain . . . absolutely positively certain . . . Real Estate will take off again in Key West within the next 18 months. Most of these cheerleaders feel a 10% growth rate will become the new norm since "they aren't making anymore Real Estate in Key West.

When I try to get these folks to think about my $22 million rental home in 2037, they blink at me like I am from Mars as I try to explain the simple math using their 10% annual"easy" gains they expect to materialize in the near future.

Anyway, let's get back to the calculator.

When you open it up, play with the slide parameters on the left hand side of the page.

Please note when this calculator says I should consider buying this home I live in and quit renting: NEVER.

Never, never, never.

Now, the only way this would change is if this freaking $1.4 home comes down in price. How far down?

Well, I changed the pricing of the house from $1.4 million to $1.3 million, then $1.2 million, and so on til I hit $500,000. Guess what? This calculator still shows it would be better to rent this place for 30 years.

It's not until I change the price to $400,000 that we see I would begin to to be cashflow positive in year 9 or 10 of a 30 year loan versus renting at $1,825 per month with a 3% increase in rent yearly.

I think all of you will enjoy this calculator as it is quicker than using a handheld TI calculator with a bunch of different formulae figuring amortization schedules. The slide on this NYT calculator makes this a breeze.

Check it out, bookmark, and enjoy!

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=1&oref=slogin