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To Rent or to Own - A Discounted Cash Flow Perspective
Shelter consumes the largest component of most household budgets. The decision whether to rent or own a home is therefore of utmost importance. For users of Microsoft Excel, a discounted cash flow (DCF) spreadsheet can assist in the decision-making process.
Inflation is generally regarded by many as a bad thing. However, this is not necessarily true for home owners. While many home ownership costs do rise over time (home insurance, property tax, home maintenance), the most significant home ownership cost - payments on the home finance loan - are not affected by inflation.
By comparison, households who rent their homes can expect their monthly shelter costs to increase over time at roughly the rate of overall price inflation. Since housing rents are included in the "basket" of goods used by statisticians to measure inflation, this link between rent and inflation is not surprising.
Microsoft Excel to the Rescue
The Housing Purchase Analysis Model is a discounted cash flow (DCF) spreadsheet exploring the long-term financial costs and benefits of home ownership. The model compares shelter costs for two scenarios - a home ownership scenario and a rent-a-home scenario.
First Time Home Ownership: "Scenario 1" assumes first time home ownership. Up-front costs include the down payment on the home finance mortgage, home inspection, and legal fees. Ongoing costs include monthly home mortgage payments, utilities, and repairs. Certain costs increase over time, whereas others are inflation-protected.
Rent a Home: "Scenario 2" applies the "benchmark" costs of renting a home. This rent-a-home scenario involves no up-front outlays - only ongoing rent. The future cost of rent is assumed to grow with inflation.
To Rent or to Own
The Housing Purchase Analysis Model compares rent versus home ownership costs in future years. Shelter-related costs are compared both excluding home equity (indicating the change in "out-of-pocket" costs), and including home equity.
Download Spreadsheet from Author's Website (Requires Microsoft Excel)
The author, Mark Szekely, has been designing simple Excel templates to help with personal financial planning for over ten years. Mark can be contacted through his website below:
Excel DCF Models | Discounted Cash Flow Mortgage Refinancing, Loan Amortization, Vehicle Finance and Lease, and More!
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