Everybody has seen a rent-versus-buy analysis. On one side you add up the mortgage, taxes, insurance, and maintenance costs (being sure to adjust for the tax write-off of the mortgage interest). On the other side you add up, well, just the rent, really. Then, at the end of 30 years the homeowner has a house and the renter has... nothing. Here's a different way to look at it.

What's the value of a house owned free-and-clear? Market value is one aspect, but market value has been kind of wonky just lately. Wanting to find another way to come at the value, I figured I could value the house by calculating how much extra the renter has to pay each month, once the mortgage is paid off. Then I could compare that stream of (avoided) payments to the value of an investment that would provide an equivalent stream of income. The value of the house would be the same as the value of that hypothetical investment.

For example, if the homeowner's taxes, insurance, and maintenance comes to $300 a month when rent was $500 a month, then ownership is saving the owner $200 a month--and $200 a month is worth at least $48,000 and quite possibly as much as $60,000. (That is, you could invest $60,000 in a diversified portfolio and pull out $200 a month, probably forever. If you only had $48,000 invested and you pulled out $200 a month, it would last a long time, but maybe not as long as a house.)

So, I was doing that analysis recently, but trying to be a bit more comprehensive--including all the extra expenses of homeownership, and making it specific to my own situation, which I knew would tilt things a bit toward the renting side of the comparison, because I've got a great apartment with certain amenities included in the rent.

So, in my analysis, I put these things in the cost-of-owning column:

  • property taxes
  • maintenance
  • insurance (after subtracting what I pay for renter's insurance)
  • water
  • sewer
  • garbage
  • heat (included in the rent here)
  • basic cable (also included in the rent here)
  • recycling fee (paid by homeowners but not renters around here)

(Homeowning friends kept mentioning other expenses that one or another of them paid, such as lawn mowing, snow plowing, and burgler alarm service, but I didn't include those because I figured I'd generally do those things for myself (or do without them), rather than pay cash.)

After talking to friends and relations to get estimates for those costs and then adding them all up, I was shocked to discover that you could give me a house for free and I couldn't live in it as cheaply as I can live in my apartment.

Now, maybe some of my estimates were on the high side. In particular, my estimate for maintenance of $2000 a year is probably higher than most people would estimate--but I was trying to include not just fixing things but also each year's share of the major expenses (new roof, new windows, new doors, new garage door, new furnace, new air conditioner, new appliances, repainting, refinishing floors) that you might have to pay only once every 15 or 20 years.

Of course, a house might well be a nicer place to live. A house will almost certainly be bigger than our apartment, have a yard, a place for a garden, probably a garage--all things we don't have. And we realize that we've been really lucky--sane landlord, few noisy neighbors, good maintenance, well-kept grounds--all things that could change at any time. (Of course neighborhoods can change around a homeowner, too. And while if things go downhill here we can just move, a homeowner might find himself stuck trying to sell a house in a neighborhood that has gone downhill.)

If you can afford to live in a house, and you want to, then by all means buy a house. (Especially if you can't find an apartment that's both excellent and cheap like ours.) But take a close look at the relative costs, not just a simple-minded rent-versus-buy analysis.