Moving to Chicago this past weekend prompted the age old question, should one rent or should one buy?
Independent of the qualitative and lifestyle differences between the two choices, I was curious how - strictly speaking - the finances between the two options worked out. Using the Case Schiller Price Index for Condos in the Chicago metro, and the historical return rate on real estate prices, worked into a short R function, produced the below results.
Worth noting, the calculation included:
- The opportunity cost of capital
- Historical returns on real estate prices
- For Owning: Mortgage, property taxes, closing costs, Home Owners Association fees, cost of ownership
- For Renting: Rent, Utilities
However, it did not include:
- Mortgage interest Deduction
- Non linear mortgage amortization. (This one is linear, rather than being skewed towards the latter years as would actually happen on a traditional amortization schedule)
- This assumes a 20% downpayment, rather than some other available options, such as the FHA loans that allow for as low as 3.5%.
Given these basic assumptions on relative costs, it seems to confirm the somewhat common folk wisdom that it takes about 4-5 years for the initial hit of the closing costs to be paid off by saved expenses and amortization of the mortgage loan.