Rent or Buy Calculator

I often get asked if it is better to buy or better to rent. Since the answer to that question is complex and depends on many variables, I decided to devise a simple calculator that can potentially help you get a crude answer to this question. Plug in your numbers and get your results! (just scroll down and you will see it).

You must keep in mind though that in order to get accurate results that fit your particular situation you should consult with an accountant/banker/lawyer before making your decision on whether to rent or buy.

How does the calculator work?

It depends on how well YOU think you can do as an investor and how quickly YOU think your potential home will appreciate in value. Suppose you had a sum of money which is all your net wealth. You can either invest it in various instruments, or you can use it to buy a home (use it as a down-payment).

If you rent, your net wealth generates returns for you from your investments. Every year you also save your after-tax income minus your rent, minus other expenses. These savings are added to your next year's investments and generate more returns. At the end of 25 years, you will have accumulated some net wealth but will have to subtract the tax you should expect to pay on your capital gains on your investments.

If you decide to use your net wealth as a down-payment on a home, you will incur yearly mortgage payments with a 25-year amortization period, where I assume that you get an interest rate of 3.5%, which is a 500 CAD mortgage per month per each $100,000 borrowed (roughly). As well, you will have to pay property taxes, and incur depreciation and maintenance on your home. When purchasing your home you will also incur expenses of roughly 1% in land transfer fees. Your home appreciates at some expected rate (you have to decide what you expect). However, your after-tax income minus mortgage payments minus property taxes minus maintenance and depreciation lead to different savings than when you rent (I conservatively assume that property taxes plus maintenance plus depreciation have an annual cost of 2.5% of your home purchase price). Whatever you save is added to your non-housing investments every year, which yield returns as you estimate for the case in which you rent and invest. At the end of 25 years, your home is completely yours, but assuming you choose to capitalize on the capital gains from the appreciation of your house, you must sell it and thus you have to pay 5% of your home sale price as a transaction fee (Realtors, etc). As well, you are taxed on your capital gains on your non-housing investments.

You should keep in mind that my calculations abstract from many other considerations, such as location, job security, mobility (easier to move out of a rental), liquidity (it is harder to liquidate a home than most non-housing investments), time and effort (to get a mortgage), changes in family structure, and other personal preferences.