The age old question: Should I rent or buy real estate? One thing we know for sure is that you need to sleep somewhere each night, so it is safe to say that we all must encounter this debate at some point in our lives (after all, living "rent free" with the Parents is not an option forever...nor should it be).
Another thing we should all know by now is that numbers do not lie. In other words, the mathematics tell the story as long as you know how to calculate the numbers involved. With this concept in mind, below is a real life scenario for your review. The goal is to help you see a bigger picture when encountering the common question of should I rent or buy real estate?
In the scenario below, we have someone choosing between renting or buying real estate. If they rent, they are scheduled to pay $2500 per month for a 1 year lease. Each year, the Landlord has the option to renew their lease at current market rents. In this example, we are forecasting a modest 3% increase in rents each year over the next 5 years. We are also showing a conservative estimate of a mere $25 per month in Renter's Insurance.
In choosing whether to buy a home, the following scenario is "on the table" for consideration. The home would cost $400,000 to purchase, require a 5% down payment ($20,000) and $3500 in closing costs to acquire the mortgage loan. In terms of ongoing expenses, we will assume an estimated $1100 per year in Homeowner's Insurance, $4650 in property taxes, and an extra $2000 per year in incidental maintenance. At the time of publishing this article, interest rates for a 30 Year Fixed Mortgage are hovering around 4% (and even less if a 5 Year Fixed Mortgage). To factor in a pad for Private Mortgage Insurance (since only 5% is being put down), a 5% "interest rate" is being used for calculations. We will keep the same 3% per year in estimated property appreciation (value gain) over the same 5 year period.
A couple of other factors to consider moving forward is that regardless of whether our subject rents or buys, he/she is required to pay Income Taxes at 25%. We will also assume that at the end of the 5 year period, he/she will choose to sell the property at a 6% sales cost (assuming he/she opted to buy the property in the first place).
So how do the numbers stack up? See below!
In the above scenario, the monthly cash flow was nearly a wash (a total of $232.17 difference after 60 months). When you examine the other pertinent factors in detail however, the property is scheduled to gain $63,709 in value, while offering an additional $28,648 in tax benefits**. Even when factoring in the costs involved to purchase the home, and to eventually pay off the existing loan and sell the home, we have a GAIN of $91,854 to reward the choice of BUYING vs renting!
**This article is not intended to provide tax advice (this is a big "no no" in our industry). That said, please consult a Certified Public Accountant (CPA) for any tax advice. I would be happy to refer a qualified CPA to you if/when desired.
Will every assumption pan out perfectly? Probably not. Do any of us have a crystal ball? If you do, please loan it to me. The purpose of this exercise is to show the true variables involved (since we commonly tend to look solely at monthly cash flow, which only tells part of the story).
If you would like a customized analysis like the one above for yourself and/or your Client, please contact me. I am more than happy to assist you in answering the age old question: should I rent or buy real estate?
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