Thursday, November 29, 2007

Wow that was fast! And an update...

Thanks to Alex @ The Front Steps for linking to my previous post. I sort of assumed it would be a long time before anyone would visit this blog, so I'm a little shocked to see all the people downloading the spreadsheet I made only a matter of hours after posting it. This internet thing is crazy, isn't it? And as a huge fan of TFS, I'm more then a little flattered.
Welcome TFS readers, and I hope you'll come back and visit.

There have been a couple suggestions and comments made at TFS, so I thought I would port them over here, so anybody else happening to stumble across this blog would have some idea of what's happening, and that way I won't wind up answering the same questions over and over again.

anon8mizer makes several great points regarding taxes on capital gains. It's going to take me a little bit to assimilate these into the spreadsheet, as some of these are somewhat complex, and I'll need to make sure I understand them fully before coding the formulas. But I will do so.

bevel444 wonders why I don't have a field for rent increases. That's a good point. The short answer is that I am a bit myopic (as well as more then a bit lucky) and due to a wonderful landlord who our family adores, my own rent has not budged a penny in over five years.
But obviously, I'm the exception, not the rule, so I will add have added in a field to adjust for rental increases. I think those of you looking for this to wildly tip the scales will be dissapointed. In SF most apartments are rent controlled and any apartment that is rent controlled can only have an annual increase of half of the Consumer Price Index, which for this year is only 1.5%.

DGee points out that higher tax rates (i.e. higher incomes) can result in greater savings for owning. This is true, and is one of those things that makes me want to say in a church lady voice "isn't that special?". It's essentially welfare for the wealthy, right? Or am I missing something? You buy a fricking nice ass house, and my country gets less tax revenue. Nice.

James wonders if there is someway to share the spreadsheet without forcing people to be authenticated. He says they all need to give me their email. James: I don't get the emails. Don't see them at all (or if I do, I'm not aware of how). I'm on blogger, not typepad (I think! new to this blogging business...). At any rate, I'm still thinking about a better way to do this, and if you or anyone else has a suggestion, I'm all ears.

Anyways, enjoy, and keep the feedback coming.


Sophie said...

tax brackets. yes and no. yes, you MAY qualify to use pre-tax dollars to pay you house.
Like you MAY pay $12.000 a month in pre-tax rater than taxed dollars.
However, you still pay a "fricking nice ass house" property tax.. which would be $2000/month in that case. Only to have the "fricking nice ass house" property tax money spent on public schools - while you still cough 25000 in private Kindergarden for your kid, spent on free healthcare for all - while you spend thousands in not-covered botox etc.
Seriously, dont go that way. There are some ultra mega rich people who couldnt care less about the cost of anything, and then there are some "they seem rich but looking at their budget, I'm not sure I'd want to be in their shoes".
Keep your focus on the submedian houses, and I'll keep reading you with a lot of interest.
This is a VERY WELCOMED blog for normal people, talking about normal houses. Leave the bitterness/jalousy/gossip etc for others.

Missionite said...

Hi Sophie,
I appreciate your comment, and I understand were you are coming from.
However, as someone who has personally experienced and lived in just about every class including homeless, poor, middle class, upper middle class, and even occasionally hobnobbing and doing busines with with some of the richest (and most famous) people in America, I'm also familiar with how the scales of the current financial system are tilted in favor of those with wealth. Even some of the wealthiest people in the US (such as Warren Buffet) have concerns about our economic system turning into a plutocracy, so I don't think it's fair to say, without knowing me, that I came across this position out of bitterness or jealousy (emotions which I am admittedly not immune to, but which I don't think are a factor in this particular instance).

I can't help but have a point of view, so I can't promise you that I won't share this point of view from time to time (that's what a blog is for, right?). On the other hand, I can assure you that I do not intend to use this blog as a soapbox for classist screeds, and I think my opinions are more likely to be in the form of the very occasional witty (I hope) sarcastic (likely) aside, and not the focus or main thrust of my posts here.
In short, I am more interested in building a blog based on facts, then on opinions. And it sounds like that is what you are looking for, so keep checking back and we'll see if you continue to find it interesting.

R said...

Very cool spreadsheet, thanks for sharing and for maintaining it!

I have a few comments on some of the calculations:

1. In "Monthly contribution to investment" (cell B78), you're assuming that rent stays the same (you're subtracting the "Equivalent Rent" field). Instead, you should be subtracting the equivalent "Monthly Rent", that is divide the "Total Rent Expense" by the number of years you spend in the house, to take into account rent increase.

2. In the "Rent Income" section, you're assuming that the appreciation on the down payment is 5% after tax. This is fine, but you should state the assumption explicitly, since many people who invest in fixed-income, may get taxed on those gains.

R said...

Also, I plugged in the same numbers at That's also a housing calculator, but what it does is try to reverse-engineer the "equivalent rent" you'd have to pay to live somewhere in exchange for buying that particular house so that you come out even at the end.

The numbers don't quite come out the same, and I'm not sure why (your spreadsheet makes it seem that renting is far more economically advantageous).

However, the math seems correct in both places, so I'm not sure what the reason is ...

Missionite said...

Nice catch on the equivalent rent bug. I didn't add the rental appreciation until later, so I forgot that the monthly contribution was still linking to the equivalent rent field. This is the kind of diligent proof reading I need, so thank you for that!

Your point on disclosing assumptions is also well taken. I have added a disclosure on the bottom of the spreadsheet that addresses the assumptions I made regarding rental investment income. I am open to suggestions on this front if somebody has a better way to handle this.

I don't see anything when I visit the site you listed so I can't speak to their methodology. But I can tell you that the spreadsheet I made takes the rather optimistic view that 100% of the difference between renting and owning will be invested on an ongoing basis, and generate at least a 5% return. I start with this assumption because that is the true apples to apples comparision, but I do encourage people to tap this number down to a more realistic amount based on their personality and spending habits.

I doubt the website you linked to does this, and I suspect that may play a big part in the difference.

R said...

Thank you so much for making the changes so quickly! :)

As for, I'm surprised to hear you can't access it, are you using Internet Explorer or Firefox? It's a very popular site, I just checked and it works for me (using Firefox).

That site (housemath) *does* make the assumption that you'd be investing the leftover cash somewhere, and in general seems very similar to your spreadsheet in methodology. That's why I thought it was an interesting comparison ...

Missionite said...

Ah I see, you were missing a "www" in front. Not sure why my browser was tripping on that (new computer with the new eexplorer, so who knows, haven't downloaded firefox yet...)
Let me investigate...

Red said...

Hiya, you do have a few bugs in the spreadsheet.
Seems the main problem is the computation of income on the amounts not spent by the renter.
The owner loses the money for interest, taxes, insurance, maintenance etc gradually, not at the beginning, and the sales costs - (and actually, most of the maint costs as the place is made ready to sell...) only occur at the end of ownership, when the much poorer home owner becomes a wiser renter.
Then it looks like the Own vs Rent difference seems to be about twice the right amount; perhaps the $170000 down payment, which the owner gets back (mostly), is being included in the renters income?

R said...

@Red: I think the point of the spreadsheet is to compare the situation of a home owner after owning (& selling) a home after 30 years vs. renting a home for 30 years.

In that sense, you can count the downpayment (& appreciation) as rental "income" because you have it as liquid cash after renting for 30 years, whereas you don't have it after owning for 30 years.

Missionite said...

The housemath site comes up with a breakeven point of $9487.45. That's not too far from my breakeven point of roughly $10k.
They do look at things a little differently then I do, from what I can tell, as their approach is more generalized, while mine is more specific to SF.
I'll have to look at their site in more depth when I ahve more time. At the moment I gotta run...

Missionite said...


There is absolutely no guarantee that the owner gets any of the down payment back. In fact it is entirely possible for the owner to have to cut a check AFTER selling the house, in order to pay back the loan. In many cases even modest appreciation will result in losing all of your down payment.

The "down payment" on the renter side is not income per se, but the interest you earn on it is. And it must be included in the assets you still own when you rent, which is why it is in the "income" section.

BTW the "income" section is in quotes, because it is not technically or strictly income as defined by an accountant, it was just a tag I gave that section to describe anything that contributed positively to a renter's financial status.

The point of the spreadsheet is to calculate the true cost of ownership over *any* given period of time, not just 30 years. A down payment that is not ameliorated by declining home value or transaction costs shows up in the owner's final gain/loss statement, just as it should.

blaise5000 said...

On the spreadsheet with the $1.4 mill house - the "Total Interest Expense" is $85732.70, not $56,220.09 - you forgot the interest above $1 mill.

Also, how do you arrive at the "Gain/loss of ownership"?

Missionite said...

Hi Blaise,
Somehow I missed your comment. Hopefully you will return and see my answer.
Someone else caught my error in forgetting to add back the interest above 1 million. That has been fixed in the latest iteration.

Gain/loss of ownership is calculated by taking the sale price and subtracting how much you owe on it (i.e. loan balance at the close of sale), and how much you spent on it (i.e. total post tax expenses including maintenance, property tax, interest, insurance, closing fees, commissions, etc.).
If the resulting number is negative, then you lost money, if it's positive, then you made money.