Buy Vs. Rent (Download the Model)

by Osman Parvez
As part of due diligence, it's very important to do the math before making a real estate purchase. Although I recommend everyone run the numbers, it's especially important for first time home buyers and current renters.

About a year ago, I built a model that took your assumptions including length of ownership, appreciation, maintenance costs (and many others) and calculated the difference in cost between renting and owning. I do this because the online calculators I found were woefully inadequate. I've since sent hundreds of copies of my buy vs. rent model to people who contacted me.

Previously available only by request, you can now download the latest model directly. As before, be sure to read the included instructions before diving in. You should also read the posts linked above for a discussion on the model. If you have specific questions, free to contact me.

p.s. If you modify the model and think your version would be useful to others, please let me know.

image: Carnaval 08

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  1. Lost opportunity cost of the downpayment and purchse expenses.

    $220,000 purchase, 20% down plus costs is $45,000. At 5% double tax free municipals in 10 years that turns into $73,000. $195,000 in 30.

  2. It's in the model. There's a calculation for alternative investment of down payment. Put in your favorite investment and match the holding period.

    p.s. I'm surprised you're an advocate of municipals Rob. As a housing bear, I'd expect you to advocate inflation protected treasuries or something along those lines.

  3. Call it a California bias. Fed 28% and State 9.3% and No end of subsequent taxes I thought I was being conservatve and simplistic for the purpose of my comment. I'll look again, maybe I screwed up.

  4. So.. basically you're saying that if the municipalities see a revenue shortfall, they'll just squeeze a little more out of homeowners through higher taxes instead of defaulting? Ouch.

  5. Okay, I looked closer. Yes, you reinvest the downpayment but you don't reinvest the difference between mortgage and renting.

    On the second point look at California and the myth of low property taxes via Prop 13. Now we have Mello-Roos and Special aSsesment Districts. This extraordinary and unusual special and rare circumstances include things like sewers and street lights. Special yeah.

  6. as another reader pointed out, one major flaw in the anaylysis is that you are not considering savings over mortgage payments (and insurance+maintenance+hoa) - which could be invested in some type of fixed deposit account at at 5%. this completely changes the rent vs buy decision in the short term.

  7. Good point. So you're saying that you want to see a reinvestment of each month's savings and not just a reinvestment of the downpayment.

    That's fair enough. In the short and long run, that could have an impact. It's also an rather large assumption that people would reinvest the savings each month. However, it's a rather easy fix. I'll add it to the next version of the model.

  8. hi! i'm sorry i took too long to respond. i appreciate you using my abacus photo in your site. =] good luck and happy holidays! -carnaval08


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Please Note

This document contains forward-looking statements. You are strongly cautioned that investment results are subject to business, economic and other uncertainties. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time. Always consult your financial advisor before making an investment decision.