Should I Buy or Rent a Home – 1 Great Example
To Buy Or Rent
Should I buy or rent? This is a question that we will all ask ourselves at one point or another. There are many calculators online that will help you make this decision however I want to help you understand what they are telling you.
Conventional wisdom states that it is almost always better to buy than to rent. It really depends on your current financial standing and the time you plan to stay in your home.
We often ask ourselves: Is now the right time to buy?
First here are the general pros and cons of renting:
Pros of Renting and Buying
Pros to Renting:
- Short term commitment
- Zero Upkeep Costs
- Some apartments come with nice amenities
- Flexibility (have 1 bed but need 2 all of the sudden?)
- No mortgage debt
- No need to spend your savings
Pros to Buying:
- Monthly Payment goes towards ownership
- Home Buyers are with 46X’s more than renters on average.
- Tax benefits
- Hedge against inflation
- Costs less than renting over time
- You make the rules of your home, not a landlord
- Owners can make changes as they like
The Calculation Breakdown: Buy or Rent
Generally the reason why someone doesn’t buy a home is because they don’t have the money.
Perhaps they don’t have the money for a down payment. They don’t have a secure enough job. Or possibly they have the money but are unsure if they can commit to living in one place for a certain amount of time.
Let’s look at the numbers. Most of us rent because it’s all we can afford, or so we think.
Let’s say you are renting for $1500/month. This, in Portland, will get you a 2 bedroom apartment. If you wanted to keep your monthly payment the same, you would be looking at about a $215K mortgage. This might get you a 2 bedroom home on the outskirts but I want to look at a 3 bedroom home a bit closer in. I will first look at a $325K home price.
If flexibility is your reason for not wanting to buy, you might consider buying and then renting your home out when you wanted to move. That way you keep the home and continue to build equity.
That aside, the question is how much will it cost me?
If you were to rent at $1500/month after 3 years and 11 months it would make more sense if you would have purchased a home. If you rent, after 3 years and 11 months you will have paid $73,130 (with 2.5% inflation increase added in).
If you purchase, after 3 years and 11 months you will have spent $72,457. But how does this make sense? What about the money you put for a down payment, taxes, insurance, etc?
Below I ran an FHA (3.5%down) vs renting scenario as well as a traditional 20% down scenario. With the FHA it’s a break even after 3 years and 11 months. With the Traditional breakdown it’s 5 years and 7 months. This breakdown is strictly for cost over time.
Buy or Rent Expenses Breakdown:
Rental Breakdown vs FHA
Assuming a rent appreciation of 2.5%
12 months x $1500 = $18,000
12 months x $1537.50 = $18,450
12 months x $1576 = $18,912
11months x $1615 = $17,765
total spent = $73,127
Renting Breakdown vs Conventional
Assuming a rent appreciate of 2.5%
total spent = $106,493
FHA Buying Breakdown
Assuming home price of $325K, 3.5% down payment, 30 year term, 2.12% property taxes, .25% hazard insurance, 3.5% home appreciation, .5% home maintenance.
Amount to Bring to Close: $27K
Mortgage Payments w/ insurance: $118,867
Maintenance: $6,823
Total Out Of Pocket = $152,690
Equity/Tax Savings:
Principal Paid $20,695
Appreciation $46,877
Tax savings/write offs = $12,660
Total equity/savings = $80,232
Buy Costs = Total out of pocket – Total Equity/savings = $72,458
Traditional Buying Breakdown
Assuming a $325K home, 20% down, 30 year term, 2.12% property taxes, .25% hazard insurance, 3.5% home appreciation, .5% home maintenance.
Mortgage Payments w/ insurance: $126,199
Maintenance: $10,017
Total Out Of Pocket = $215,370
Equity/Tax Savings:
Principal Paid $28,071
Appreciation $68,822
Tax savings/write offs = $12,121
Total equity/savings = $109,014
Buy Costs = Total out of pocket – Total Equity/savings = $106,356
In the above scenario I randomly selected a monthly rental of $1500/month vs buying a $325K home.
If you wanted to keep your monthly costs at $1500 then these numbers would change drastically. Just to give you a quick “for instance.”
If you have $28K to bring to closing, you could afford a home for $211K. If you found a home for that price then your break even goes down to 2 years and 11 months.
For every month after that, you are saving money vs renting.
You can see on the graph that over the 30 years, the cost to rent goes up almost lineally and the cost to own goes down to nothing.
The reason this goes to 0 is because your total out of pocket expenses over 30 years would be $592,62.
Your total equity and tax savings over the same time would be $593,169.
Conclusions to Buy or Rent?
Ultimately it comes down to how much money you have to buy, how much can you afford monthly, and what your priorities are. I don’t think that buying a home is right for everyone at any given time.
If you would like assistance in figuring out what it would take to get you into a home, how much home can you afford, give me a call and we can work it out together. Two heads are better than one.
The online calculators don’t do a good job at accounting for things like inflation, rent increases, insurance and taxes, etc.