I’ve recently overheard some discussions about people deciding to rent when they have the capacity to buy. Some indicate or believe housing prices will still keep falling, others like what they call the risk free feeling they have as a tenant, and still others are just undecided so they are staying put.
My thought is we all have to live somewhere so what is the real difference between renting and buying?
Maybe a simple example will help to make my point.
If someone is renting a house today and they could buy the same house wouldn’t it be wise to see what the long term effects would be for each decision? I call it the rent versus buy comparison, and I’ll use a real life property I personally own as a rental in the following example.
Here stands a 4 bedroom, 2 bath, single family detached home that has a 2 car garage, living room with fireplace, dining room, family room and kitchen. It is on a view lot, has plenty of room for the kids to play and has central air conditioning. The house was recently appraised for $450,000. For the purpose of my example I’m using 100% financing, a 4.25% interest rate for a 30 year fixed mortgage.
Here are the numbers:
Current Rent Monthly Payment
Property Taxes $375.00
Total $2,195.00 $2,655.91
Looks like renting is better than buying right? But as radio personality Paul Harvey would say; now you know the story but here is the rest of the story…..
If rents increased 5% per year the cost of the rental would pass the cost of owning in less than 5 years and you have to remember that the mortgage costs are fixed for 30 years and some of that cost is going into equity and that’s a good thing.
Another factor to consider would be the tax benefits of owning versus renting. If you check with your accountant or tax advisor you will be in for a pleasant surprise. As a general statement—if the interest on your mortgage is $19,125 based on a $450,000 loan balance with a 4.25% interest rate and your Federal Tax Bracket is 25% then your tax savings on a monthly basis would be approximately $400 per month. If you deducted your tax savings alone your net payment would be about $2,255 per month.
Makes buying sound a bit more interesting when you get into the numbers doesn’t it?
I suggest that you take the time to consult with a Realtor so you can get the complete story and then armed with the right information you will be able to make a decision if buying or renting is the right option for you ….
Last of all, imagine if the house remained valued at $450,000 and it was 30 years and 1 day from the day you bought it, you would have an asset worth $450,000 while the person who decided to rent would have nothing….