Rent vs Buy …. which is right for you?
Buying a home is a very personal decision for each individual. Eventually there will become a time where you will investigate whether it makes more sense to rent or buy a home. Buying a home should never be strictly a financial decision. While you should definitely consider the financials when buying a home there is also a sense of security and pride of owning your home.
Lately, I have been showing some rentals and have noticed that rents are on the rise, while interest rates are extremely low. If you look at the financial piece and do an analysis of rent vs buy, it may actually cost you less to own a home. I decided to do a case study to see if that was true. So to compare apples to apples I had to find two units in a condominium complex that were alike.
Case study of rent vs buy
I was able to find two identical units in the same complex at Carter Green in Tewksbury Massachusetts. One was available for rent for $1500 a month while the other was for sale for $182,900.
|Tax Deduction /mo||$175|
The assumption are a 3% down payment at 5% interest rate. Assuming the borrower has good credit and closing costs are paid by the seller. This would be a Mass Housing loan scenario. The other assumption is the borrower is in a 25% tax bracket. One area buyers tend to forget is your interest payments and property taxes are tax deductible!! So while your monthly payment may be higher on a pre-tax basis. You will recoup that and then some when filing your taxes.
In this Rent vs Buy scenario, buying actually saves you $132 a month right from day one!!
Benefits over a 10 year period of Buying vs Renting
I visited the Freddie Mac Rent vs Buy calculator and the results showed that over a 10 year period if you cashed out of your home, after 10 years, you would have saved $85,000. This savings was calculated using a minimal rental increase of .5% a yearly home appreciation of 1.5% maintenance of $250 a month (HOA fee plus a $100 a month for additional maintenance). As time goes on the benefit of buying vs renting becomes greater. More and more of your payment goes to principle as each month goes by as well as real estate over an intermediate period tends to rise at about a 3% annually. The greatest benefit is in the natural appreciation of real estate over time.
Buying vs. renting maybe right for you, if:
- Have reliable income, good credit.
- Can afford at least a three percent down payment..
- Want a chance to build equity and be eligible for homeowner tax breaks and credits.
- Have adequate cash reserves to weather any storms, illness, job loss……….
- Planning to stay in your home for 5-10 years
Other Benefits of Buying vs Renting
While the financial piece of buying a home needs to make sense for you there are other considerations that make buying a house attractive.
- Its yours!! You can personalize your space and make it your own. When you rent an apartment you do not want to spend any money making capital improvements because when you move that all stays behind and the landlord benefits.
- Stability. If you own a home you don’t usually have to worry about getting pushed out by things beyond your control. There is nothing worse then being happy where you are at and then find out you have to move due to a variety of reasons. I have lived in places where a new landlord comes in and jacks up the rent to something I can no longer afford. I have been asked to leave on a tenant at will basis because the owner wanted their daughter to live in the unit. There can any number of reasons where you are pushed out when you rent that would not happen if you purchased your own home.
- One set Payment. Most people use a 30 year fixed rate mortgage. Your principal and interest payment will always be the same. Of course taxes and insurance will adjust but your base payment will be the same. As rents rise your mortgage will remain the same. If I stayed in the first house I bought my mortgage would be well below market rents many years later.
- Pride of Ownership. For many there is a certain pride in ownership. Home ownership is called the American Dream for a reason.
Again, these are just some of the non-financial reasons to buy a home. There certainly can be more reasons depending on the individual. A good buyer’s agent cannot only show you homes but they can help you make the decision of whether it is the right time for you to buy a home. I have certainly worked with several potential buyer’s over the years where we have concluded that it is not the best time for them to buy based on their individual needs and wants and circumstances.
One scenario I usually caution buyers to avoid is buying for a very short period of time. While owning real estate over the long haul is usually a good choice, buying for just a 2 or 3 year period can have some inherent risks as we all have seen over the past few years. View the historical graph of home price appreciation. While housing is appreciating it’s great, but what happens when housing goes into a decline?
If you are considering buying contact Kevin Vitali, your Massachusetts Realtor at 978-360-0422. Kevin can help you walk through the decision making process as well as the home buying process.