Real Estate Financing and Investing/Should You Buy a Home or Rent

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For many people, the decision to buy a home is more emotional than economic. But if you are wondering about whether or not to go on renting, here are some questions to help you answer when renting is right:

  • Do you have enough money to put down to buy a home? The initial cost of home ownership can be substantial. For example, for a $100,000 house you should figure on having anywhere between $10,000 to $20,000 (10% to 20%) for the down payment, $3,000 to $6,000 (3% to 6%) for closing costs and a $2,000 cushion for contingencies. Thus, at the time of purchase you will need to pay cash of anywhere between $15,000 and $28,000.
  • Are you the roving kind? If you stand a good chance of being relocated in a few years it doesn`t make sense to buy because of high borrowing, closing, and commission costs.
  • Do you live in an area where renting makes sense? In regions where there is a housing glut and rent controls and values are flat or falling, renting ends up being a bargain.
  • Are you lazy or a born renter? Can you deal with maintenance and lawn mowing? Or would you rather leave it up to a landlord by renting? Are you enjoying the appeal of community living and access to amenities such as swimming pools and tennis courts?

The disadvantages of renting are primarily financial and economic. Owning a home is still the best tax shelter there is. The renter does not receive any federal tax deductible benefit from rent payments. Also, the rent payment does not contribute to building your equity, you are at the mercy of rent increases and the landlord.

Homeownership has the following advantages:

  • You are building equity due to the appreciation in the value of the home.
  • In the United States, interest and property taxes are deductible on the tax return.
  • Usually less costly than renting.
  • You may enjoy extra living space and privacy.
  • Single family homes are usually in better locations than apartments.
  • You will have a sense of stability and roots in the community.
  • You will enjoy pride of ownership.

Note: The disadvantages of homeownership tend to be the advantages of renting and vice versa.

In comparing rental and purchase costs, a worksheet based on Table 1 can be useful:

Table 1. COMPARISON OF RENTAL AND PURCHASE COSTS

Rental Cost
   Annual Rental Cost ($850 x 12) $10,200
Purchase Costs (assuming 30% tax bracket)
Add:
   Mortgage Payment ($100,000 @ 10%, 30 years) $10,608
      Principal = $608 (approximate)
      Interest = $10,000 (approximate)
   Property Taxes $1300
   Property Insurance $250
   Maintenance $400
   Cost of lost interest on $20,000 down payment @ 5% (after tax) $1000
Subtract:
   Principal reduction in loan balance ($608)
   Tax savings due to mortgage interest deduction ($10,000 * .3) ($3,000)
   Tax savings due to property tax deduction ($1300 % .3) ($390)
Net annual after-tax purchase costs $9,560
Annual Benefit of Buying $640

Note that annual benefit does not include appreciation in the value of your home.