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In personal finance, we have to make a lot of decisions. Sometimes it is really overwhelm and hard to make decision. Like owning our own property. Whether we should rent a property or own and buy the property. Which one is right in terms of personal finance? This is one of the hottest topics that people like to discuss and find the answer for.

Today, I want to share a formula, which will guide us to choose whether we should rent or own a property. I found this formula from Richdad.com forum. I never use it before since I don’t intend to deal with property right now, but from what I read, this formula can be a guide for us to make decision.

Here is the formula and its explanation:

“Rent vs. Own

O=P+T+A-X
R=(E*F) -N

From a cash flow standpoint:

W=(T-x)
Y=(E*F)-N

Where
O= expense to own
R= expense to rent
P= principle reduction
E= equity
T= tax savings for owning
X= expenses on house
N= rent total
F= return that you can get on your money
A= appreciation
W=cash flow for owning
Y=cash flow for renting

The conclusion on this is if your Principle reduction, plus appreciation, plus your tax savings, minus your expenses is greater than the amount you can make on the same equity you have in the house minus the rent then it is better to buy than rent, and if not then it is better to rent than buy.

EXAMPLE
An example might help. You have a $100,000 house with $10,000 in equity. Your principle reduction is $500 per year. Your tax savings is $1,500 for owning the house. The expenses on the house is $1000/year for maintenance, $2000 for taxes, 150 for insurance, and $6240 for payments givingtotal expenses at $9390. Your rent for a house is $800/month. You can get 10% cash-on-cash return on your money with a rental house. You will get 5% of appreciation on the house So we have:

O=500+1500+5000-9390= -2390
R=(10000* 0.10) - (800*12)= -8800
W=1500-9390= -8390
Y= -8800

So in this case it would be better to own than to rent. Expenses must also include financing and closing costs amortized over the length of the time you will own the home. One thing this doesn’t include is the value of rent money for the year - that is you don’t pay your rent all up front, but even so that would only reduce the rent example by $500 or so. This also makes the assumption that you have a 6% loan on the $90,000. So this shows that if you move a lot renting mightbe better than owning for that reason and because the principle will increase over time. It also shows that putting more down on a home, will make buying less attractive than renting. It alsoshows that if we have any deflationary period renting can quickly become superior. Also both are negative. A house is not an asset and in some case not a good investment. I am surprised here,as I thought renting would be closer to owning. Keep in mind that returns of more than 20% can be had on rental houses if you include appreciation. However, in this case you would be able to see a return of more than 50% on your money to have them equal. Interesting. I venture to say that this is why we are seeing such high vacancy rates. Even just measuring cash flow alone, it isstill better to own than to rent in this case. All that would be needed to change this quickly would to have the interest rates go up a couple hundred basis points. That might happen with thewar. Now all I have to do is plug in the numbers to see if I should be renting, owning or refinancing! “

Source: Richdad.com Forum