Real Estate Lingo 101: Breakeven Horizon

If you were to look at real estate as a totally dispassionate, rational, and transactional prospect, the conventional wisdom says that if you’re doing a short hitch in a city—New York, yes, but Sacramento, Little Rock, wherever, it doesn’t matter—it’s best to rent and not buy. If you’re staying for the long haul, go ahead and put down roots, buy the house and then, when the time comes to sell, hopefully you’ve built some equity and the housing market is steady enough for you to make a tidy profit.

But who thinks about real estate from a purely logical standpoint? Anyone who has stood in the doorway on moving day, looking back at a truly awful apartment with tears in their eyes, knows you can’t help but be swayed by emotion sometimes. But if you’d like a little reason to help you make the best decisions, you need to know about something agents refer to as the “breakeven horizon.”

If you look solely at the numbers, there is a definite point at which buying makes more financial sense then renting. This is the buy-rent breakeven horizon and it’s an especially important factor in your decision making if you’re buying in Brooklyn.

What’s the breakeven horizon?

The premise is that, in a normal market, your home will grow in value as you own it, offsetting any costs of ownership (including hefty buying and selling transaction costs). This advantage is weighed against gains in savings or investments gains you could theoretically make as a renter by putting down payment money toward other money-making ventures.

It’s important to note that the breakeven horizon varies across markets and as mortgage interest rates fluctuate. In general, the higher the rents are compared to home prices and the faster homes are appreciating in value, the shorter your breakeven horizon will be. For instance, in 2017, New York’s average breakeven horizon was about 2.5 years. 

But, of course, all this depends on your ability to buy and—something becoming much more of a hurdle right now, thanks to COVID-19—your ability to stay and ride out any short-term market fluctuations. This metric is also just one factor in a decision that’s highly emotional and personal. If you’re great at saving and investing you might even make more money as a renter than a homeowner.

How to calculate the breakeven horizon:

We estimate a unique breakeven horizon for up to 3,000 individual homes pulled randomly from each ZIP code and uses the estimate and rental estimate on the same houses, so we’re able to consider the costs of buying a house against the costs of renting that same house.

For buying, we assume:

  • A 20 percent down payment
  • Monthly payments on a 30-year fixed rate mortgage at the current interest rate for people with credit ratings between 680 and 740
  • Property taxes
  • Homeowner’s insurance
  • 3 percent purchase costs
  • 8 percent selling costs (because that’s how owners realize the gains)
  • Annual maintenance costs equal to 1 percent of the home’s value
  • For condos, 1.2 percent a year in HOA fees
  • Home appreciation forecasts
  • Federal tax deductions

For renting, we assume:

  • A deposit equal to one month’s rent
  • Rent payments
  • Renter’s insurance
  • 5 percent annual investment gains on money that would have been used as a down payment or gone towards other homeowner expenses the renter avoids

Play around with the numbers, weigh your wants and needs and commitment to Brooklyn. In the end, the formula won’t be so much a foolproof equation as an honest reflection of what you value and how to hold on to it.

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