• Balance today’s enjoyment with tomorrow’s needs.  Whether it’s a bigger home, a new wardrobe, or just a few extra meals out with friends, it’s tough to resist all of life’s temptations.  We can provide context for how these choices are affecting your future, and if you’re already saving enough, we may be able to empower you to spend a little more today, guilt-free. 
• Get out of debt.  We understand that especially early in your career, student loans and credit cards may have been necessary to make ends meet.  If you’re ready to get out of debt, we’ll work with you to come up with a budget that meets your needs and design a debt pay-down plan that offers a light at the end of the tunnel.    
• Get the most out of your savings.  The goals that are important to you should inform what you’re doing with your savings.  Whether it’s tax-efficient retirement accounts, college savings programs, investment accounts, or savings accounts, a good financial plan can shed light on how you can best allocate your savings.

For the purposes of this analysis, we should note that we approached the decision on a completely quantitative basis.  If it’s been your dream to own your own home, we assign no value to achieving that dream nor to the security of knowing your landlord can’t raise the rent on you for the sixth consecutive year.  Prefer the flexibility that comes with renting?  Again this is in no way taken into consideration, nor is the avoided stress of potential home price declines.  Rather, this analysis is purely about the money and specifically, how much you’ll end up with after a specified period of time given an equal amount of starting capital under each of the two scenarios. 

As background, let’s take a look at two important concepts when it comes to making your decision. 

• Buying your home requires a good amount of capital: If you choose to buy, you’re going to need some capital.  You’ll have to make a down payment, it’s likely to be sizeable (20% if you want to avoid private mortgage insurance), and you’ll also need money for closing costs.  This initial capital is an important concept, because when it comes to comparing buying to renting, we’ll have to take into consideration the fact that you could have put this capital to work in other ways had you chosen to rent. 
• You’ll face monthly costs regardless of your choice: If you buy your home, you’ll have all the associated expenses that come with it: mortgage payment, property taxes, insurance, maintenance, HOA fees, etc.  Yes, you probably get a tax deduction on your mortgage interest and property taxes, but that isn’t going to completely offset your other monthly costs.  Of course, with renting, you’ll have to pay, well, rent.  It’s the difference between these two monthly amounts (your total rent vs. all your monthly costs that come with owning) that will drive our analysis.  

CLICK BELOW TO DOWNLOAD OUR BUY VS. RENT MODEL
Buy vs. Rent – Final

So with those concepts in mind, let’s see how the buy vs. rent calculator works by thinking through the analysis chronologically:

• Day 1:
  • We calculate your starting capital by adding the size of your down payment to your buyer’s closing costs. This amount is used as the starting value of your portfolio if you had chosen to rent (and thus would have been able to invest).  We’ll call this amount your “rental portfolio”. 
• As each month passes:
  • You will incur expenses in both options. As such, we focus on the net difference between the buying vs. renting.  For example, if your monthly rent is cheaper than your monthly cost of ownership, then that “savings” is presumed to be added to your “rental portfolio”.  If your monthly rent is more expensive than your monthly cost of ownership, then that amount is deducted from your rental portfolio. 
  • If you buy, you can build equity. A portion of your mortgage payment will go towards paying down the principal balance of your loan.  In other words, when the time comes to sell, you’ll owe the bank less and get to keep more of the proceeds generated from selling your home.  Plus, the value of your home may increase, also adding to your equity.   
  • If you rent, your “rental portfolio” can earn a return. The money you didn’t use to pay for the down payment and closing costs can in theory be invested in other ways that should generate a return. 
• Ultimately, you will leave your home:
  • If you bought, you’ll now have to sell your home and move out. Ideally, the value of your home has appreciated, but the selling price isn’t going to be what you end up with.  Unfortunately, you’ll likely have to pay seller’s closing costs and a broker’s commission.  You may have to spend money to make your house presentable for sale.   You may incur capital gains taxes on profits you generated.  And of course, you’ll have to pay off whatever remains on your mortgage.  But after everything is paid off, the amount you’re left with is yours to keep and that’s the number we focus on: your net wealth at the end of the day after choosing to buy. 
  • If you rented, you’ll simply need to move out. Under this scenario, all we have to look at is the value of your “rental portfolio” to see your net wealth at the end of the day after choosing to rent. 
• Reviewing the results:
  • The ending net wealth under each option is compared and a buy/rent recommendation is offered.

Regardless of whether you chose to rent or buy, you’ll have lived in your home, made memories, and enjoyed shelter for the same amount of time before moving to your next home.  Owning your home can give you pride and renting your home can bring a sense of freedom (or vice versa), this analysis simply helps you to determine whether buying or renting that home left you with more money. 

To help you decide if financial planning fits your situation, we’ve put together some advice on two key questions that will help you decide whether financial planning makes sense for you.

1) Is financial planning worth the cost?

To answer this, you have to consider your likely results from three options:

a) Managing your money yourself, without outside help
b) Hiring a professional on a short-term, hourly basis
c) Partnering with a professional for the long-term

All else equal, options 1 and 2 will almost always result in lower total fees. If either of those options will give you returns equal to option 3—a long-term partnership with a professional—then your choice is clear.

But for many people, hiring a financial advisor on an ongoing basis will lead to the best results, even with the relatively higher fees. People in this situation may not have the expertise to manage their assets, or they may choose to spend their free time on other things, or they could simply be too busy to give their finances the attention they need. For them, the input of a professional would be a wise investment.

Even people with experience managing their finances can be well served by hiring an advisor. It’s often difficult to navigate changes in the market, especially when your own money is at stake. A financial advisor can be a critical source of guidance in challenging times, and can help maintain your overall investment and financial management strategy, particularly during the stress and confusion of market dips. And when you have an ongoing relationship with an advisor, you are more likely to ask for help before you hit serious trouble.

If you expect you’ll come out ahead with ongoing financial management, even after subtracting the fees, then you shouldn’t let the cost of the service deter you. To assess your own situation, download our Long-Term Returns Calculator, and find your expected returns under each of the scenarios mentioned above.

2) How do you find the right advisor for your needs?

First, make sure your advisor is working for you, and not for referral fees or other third-party compensation.

“Fee-only” advisors, such as Method Finance, operate under a fiduciary duty which requires them to act in the best interest of their clients. “Fee-based” advisors, on the other hand, can accept fees and other compensation from third-parties, based on the referral of a client or the client’s business.

The risk of fee-based advisors, of course, is that the third-party fees might sway your advisor’s judgement and compromise their ability to make the best choices for you. A recent study* found that only 24-percent of advisors described their compensation as “fee only,” and even some of those weren’t using the term accurately. So by choosing a true “fee only” advisor, you’ve already narrowed the field significantly.

The other key consideration is choosing an advisor whom you trust, and with whom you can forge a lasting partnership. At Method Finance, one of our central goals is building a relationship with every client so that we can make the best recommendations for them. This pays dividends for our clients, not only in the form of better advice, but also through their increased understanding of and trust in their financial strategy. So remember that your personal finances are personal, and look for an advisor who’s a true “fit” for you.