Rent vs Owning

SHOULD I RENT OR SHOULD I PURCHASE  -      ASKMRSMART.COM

Conventional wisdom was to save you money to purchase rather than simply rent.  Renting was seen as being equivalent to throwing money away. That wisdom is now in question since home prices do not always go higher.  Even in a flat market you can pay too high a price in relation to rental value.

The assumption that housing is always a “bull market” is gone.  It was easy to lose sight of the relationship between price and the rental value of a home.  This constant of home expenses vs rental value is the basis of RENT VS OWNING.

Always do the math in terms of net rent which is the annual rent a house would command, minus property taxes, insurance, maintenance costs, losses from occasional vacancies and any fees paid to property managers.

 

CHECK OUT THE CHART BELOW. 

IT IS MORE AFFORDABLE TO PURCHASE THAN RENT!

 

Sales price:     $ ___________             Monthly rent:     $ ____________

 

Use this THREE  STEP  FORMULA  to  COMPUTE  YOUR ACTUAL  MONTHLY  COST

 

(1) Total Monthly Payment   =   Monthly Payment without Tax Benefits

Mortgage Payment + Real Estate Taxes + Monthly Maintenance  = 

Total Monthly Payment

 

(2) Monthly Tax Benefits =  Monthly Savings        

Mortgage Interest + Real Estate Taxes  X  Tax Bracket = Monthly Savings

(Interest paid and Real estate taxes are tax deductible.  Change your withholding status to increase your monthly cash flow by filing a W-4)

 

(3) Your NET or Actual Monthly Cost =

Total Monthly Payment (1)  minus  (2) Monthly Tax Savings

 

$______________PURCHASE PRICE

20% DOWN $ ______      MORTGAGE – 30 YEAR PAYOUT

MORTGAGE      INTEREST      MONTHLY       MONTHLY     MONTHLY           TAX            MONTHLY         NET             

PAYMENT           RATE              R E TAXES          MAINT.        PAYMENT        BRACKET       SAVINGS         COST             

                                                                                                                                   

 

Monthly rent = $________Monthly Cost to Purchase after Tax Savings = $________                                   

 

TRY THIS COMPARISON WITH TODAY’S LOW INTEREST RATES.

 

 

SOME TIPS FROM MR SMART

Number Crunching

While home ownership provides security, it may or may not give you the returns provided by equities. House prices tend to follow the rate of inflation.

That said, home ownership has a significant tax advantage. Married couples can earn up to $500,000 tax-free when selling a home at a gain. Singles get $250,000. For a breakdown of how to qualify for this generous break, click here.

Other Factors

Buying a house isn’t strictly a financial decision. This may sound simplistic, but first and foremost you should find a neighborhood and a house that you just like.

Moreover, you should check on the sales price trends of homes in that neighborhood. If it looks like the area is declining in value, then avoid commitment: You’re probably better off renting.

Finally, don’t forget that even with the tax-breaks of home ownership, you will still be incurring out-of-pocket costs that you wouldn’t encounter as a renter from the cost of ripping down wallpaper to repairing a leaky roof. So, before you buy, estimate how much those costs will be. After all, you don’t want to live hand-to-mouth even if it is in your own home.

To Rent or to Buy
	Pros	Cons
Renting	Flexiblity (can relocate easily)	No equity
	Can invest money elsewhere (stock market)	Annual rent increase could outpace inflation
	No upkeep fees (drippy faucets, broken dishwashers, etc.)
Buying	Tax-break: deduct mortgage interest and property taxes	Property tax and upkeep
	Potential tax-free capital gain	Mortgage costs
	Emotional satisfaction	Less flexibility should you want to move; in very bad housing markets, you could lose principal.

Financing.  If you do decide to buy, it’s in your best interest to put down at least 20% of the purchase price, to avoid private mortgage insurance (PMI).

This rent vs. buy calculator lets you calculate the difference between renting a property and buying a home.

 

Monthly rent payment	$
Additional monthly fees	$
Monthly renter’s insurance premium	$
Annual rate increases:	(0-10) %

Purchase price of home	$
Annual appreciation rate:	(0-10) %
Amount of loan	$
Annual interest rate:	(0-30) %
Number of years	(1-30)
Annual homeowner’s insurance premium	$
Annual property taxes	$
Annual maintenance cost	$

Number of years for the comparison	(1-30)
Marginal tax bracket:	(0-50) %
Before tax return on savings:	(0-12) %
Assumed annual inflation rate:	(0-10) %