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March 21st, 2012 MARTY SMITH | Dr. Know
 

Dr. Know: Rental Rebuttals

Readers call foul on Dr. Know’s mortgage vs rent calculations.

drknowILLUSTRATION: Hawk Krall

You made a huge miscalculation in your segment on home ownership [“Lies My Newspaper Told Me,” WW, March 14, 2012]: You assume that rents won’t rise for 30 years… 

—G.B.F.

…remember, rents rise with house value, while mortgage payments stay the same…

—Jim A.

Uh-oh, the homeowners are revolting. (And they’re ugly, too! Ba-dum-BUM!) Here’s what they’re on about:

In last week’s WW cover story, I took on (among other things) home ownership. I argued that the main reason buyers wind up with extra wealth (in the form of equity) is because they’ve been paying more all along.

I showed if you rented for 30 years and invested the difference between your rent and your neighbor’s mortgage payment, you’d wind up with a portfolio worth about as much as his house.

In the course of demonstrating this, I did some rough calculations—probably a little too rough, since I didn’t figure in rent inflation. Thus, I hereby issue a mea minima culpa.

There are three reasons that it’s not a mea maxima culpa: (a) I’m kind of a dick; (b) I didn’t figure inflation on the homeowner’s side either; and (c) it doesn’t make that much difference.

For example, I assumed monthly maintenance costs holding steady at $1,200 per year through 2042. That seems unlikely. Plus, since I was being so nice, my figures included an extremely attractive homeowner’s insurance premium of $0 per year, a tough rate to get in real life.

When you figure in all this stuff on both sides, the numbers go from a $75K advantage for the renter to about a $10K deficit (out of a $1.4M total). That’s not nothing, but it still doesn’t put one strategy light years ahead of the other.

 
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