The beautiful thing about a spreadsheet-based calculator like that is that you can follow the calculation, item-by-item, and check it for bugs if you get unexpected results. Earlier this week, B&E posted a list of calculators out on the net, and rather than linking to my supremely excellent calculator and associated post, Robb linked to a Get Smarter About Money calculator. Ok, it’s web-based and a little more user-friendly than a spreadsheet, and has graphs and sliders (though why you need house price to go up to $10M is a question left unanswered)… but was it accurate? I’ve seen many, many terrible buy-vs-rent calculators (even some seemingly excellent ones like the famous New York Times ones that just doesn’t work for Canadians due to tax differences). So I played around with it. And I quickly saw wonky results like this:
In the comparison I have there, the price-to-rent multiple is 260X ($2500 monthly rent on a $650,000 house); as we’ve learned from previous posts in realistic scenarios it should be better to rent with prices so detached from rents. Yet here the calculator is showing a rather large benefit to buying if you can only wait 7 years or more. Then, strangely and inexplicably, renting rapidly takes the lead in the final few years of the comparison, with some sort of apparent discontinuity at year 30. If you look at their “chart” you can see more errors immediately: I had entered $2500/mo in rent, which is $30,000 per year, yet the “total renting expenses” came to just $12,360 in their chart, a factor of three too low. The buying expenses were only about $31k in their chart, whereas the mortgage alone is that much, with a total cash outlay of nearly $45k each year.
Now if you instead do the same comparison in my calculator, you’ll find that renting beats buying right from the start (due to the high transaction costs), and is fairly flat in terms of net benefit for about 10 years, at which point the investment portfolio starts to get large enough that investment returns become comparable to rent and the exponential growth becomes truly noticeable. There is no big “buying is better” hump in the middle. Moreover, the magnitude of the difference is notable: in my calculator renting beats buying in such a scenario by over $600,000 in year 30, versus the nearly break-even result from this scenario in the flashy online tool, with the same assumptions regarding investment returns, inflation, mortgage interest, and other sundry costs.
It’s a bit distressing, as other online calculators have recently been found to have serious errors as well. For instance, Michael James uncovered one on the Globe & Mail’s site, and just today news broke on retirehappy about the government’s CPP calculator over-estimating your future CPP benefits and not at all handling early retirement scenarios correctly.
Footnote: let’s say you’re not convinced that my spreadsheet is the gold standard to which all other rent-vs-buy calculators should be held. To then check the accuracy of the online calculator, let’s run the first year’s numbers manually:
Buying: mortgage $31k, property tax $6k, insurance $1.7k, maintenance $6.5k; total cash cost: $45.2k. Principal paid down: $16.5k. Net cost of owning: $28.7k.
Renting: rent $30k, insurance $0.4k; total cash cost: $30.4k. Investment portfolio gains: $10.5k. Net cost of renting: $19.9k. Cost to sell house: $39k. Gain on house: $15k. After year 1, renting ahead by: $49.3k. Online tool says: $16k.
If you notice any errors let me know.