To Buy or to Rent? That is the Question (Part One)
Photo by Steve Daniel, used with permission.
I was going to do this blog post as a Q and A, but an A and Q may be more realistic. Frankly, when it comes to real estate, a lot of people believe they have the answers already. I think that’s because homeownership is so emotionally charged. Also, HGTV.
I am going to apply some “skillful doubt” (as the Buddhists would put it) to some common, preconceived assumptions. This is part one of a two part-er. I’ll begin with the most important A and Q, and question some other answers in Part Two.
A: I don’t want a mortgage. What a ball and chain. And such a rip-off. It’s mostly interest up front for so many years anyway, and then I have to take care of all the repairs. I’d rather let the landlord take that responsibility.
Q. Did you know that when you rent you are paying a mortgage? Whose? Your landlord’s. And their property taxes, and their homeowner’s insurance, and all those repairs. The rent is priced to cover all of that. Plus, they’re trying to make at least a bit of a profit. That’s why it’s called an investment property. And it is. For them.
So, think about investing, in yourself.
Let's say a home is worth $200,000 (realistic case scenario in the south). And let's say it's rented out for $1600. Over one year, as a renter, you will therefore spend (not invest, spend) $19,200
If you purchased the home, today, you might have a mortgage loan at 3.75% (ballpark - your final rate will depend on many factors). Say you put down 5% (yes, that is possible, covered in part two). Your monthly payment, including insurance and taxes and mortgage insurance would be approximately $1238.* Already a savings.
But, you may say: I’ll spend the difference over time in repairs. OK, so, you’re estimating $5,000 a year for repairs. Excellent. And wise of you to put it away, in case you need something like a roof at some point. (Your smaller costs, electric, plumbing, appliances, can always be covered by a Home Warranty, at roughly $60 bucks a month).
Now, let’s say you leave for another ministerial settlement in five years. If you’ve been lucky enough to lease this same home for five years (sadly unlikely, as investors like to sell, that’s how they make a profit), you’ve handed over $96,000 to your landlord. Actually more, as rental payments usually go up over time. Unlike a mortgage payment.
Here’s where it gets really real. If you own that $200,000 home, even if you aren’t able to sell it for a penny more than that after five years, you’ll have spent only $25,000. A savings of $71,000.
More likely, in five years, you’d see at least a modest profit, one that would cover the $25,000, and perhaps more.
Bottom line? If you bought, you lived rent free for five years.
* (according to a mortgage agent friend of mine - who estimated high on taxes and insurance).