Let’s make up a hypothetical choice for this experiment. Let us compare the purchase of a home for $500,000 with an annual real estate tax of $3,000 and insurance bill of $1,500, to the rental of a luxury apartment for $2,500 a month. Let us say you live in the home for a period of five years and you sell it at a 10 percent increase in equity. In the case of the apartment, let’s say the rent goes up 5 percent every year. Utilities, for arguments sake, are the same, with the exception of insurance, taxes and gardening expenses on the house.
Let’s tackle the purchase first. You are putting down 20 percent or $100,000, and your mortgage is $400,000. Your buyer’s closing costs which include appraisal, credit report, title insurance, post inspections, flood certs and the like will run about $10,000. So you are investing a total of $110,000 in the purchase.
At 4.5 percent interest on a 30 year fixed rate loan, your payment, which includes taxes and insurance, will run about $2,400. Add to that $300 for extra house expenses, like repairs, and regular gardening and we have $2,700. For the five years you live in the house, you have spent $162,000.
Let’s say you sell the house five years later at a 10 percent increase, or $550,000. Closing costs and commission will run about $38,500, leaving you a balance of $511,500. You have about $364,000 left on your mortgage so after you pay that off, you will have a gain of $147,500 less your original investment of $110,000, leaving you with a net gain of $37,500. You have also enjoyed some income tax advantages over the five year period you owned the house, so all in all, you did well.
Now turning to that rental. If your initial rent of $2,500 goes up 5 percent a year, your total outlay in rent over the five years was $165,756. You got to keep that $110,000 you would have invested in a down payment on the house plus closing costs, and let’s say you invested that money conservatively, and made a five percent return. Remember, this is all hypothetical, and conditions in the financial marketplace are always fluctuating. That $110,000 you kept would return about $41,169 in interest income, but of course you did not have the tax advantages the homeowner enjoyed during those five years.
So the bottom line, after reviewing this example, is that the comparison is pretty much a wash, and doesn’t help you make a decision whether to rent or buy. The truth is we cannot prognosticate on the future, and interest rates and returns are not something to be sure about. Instead, we must turn to the intangibles. Did we have a sense of control and satisfaction owning the home? Did the freedom not to worry about caring for or preparing the rental for resale, make our lives that much more enjoyable?
Whether you are an owner or a renter is clearly a matter of lifestyle and personality. Worriers should probably rent, and confidant trailblazers buy. People who enjoy change and like to move around are renters; stay-at-home types will trade in freedom for comfort. Luckily, we have plenty of choices, and a little self-analysis will help you select the best route for you. Happy hunting!
