One of the most prominent questions in real estate is the value of home ownership over renting. As an investment, the SpotProperty real estate blog, analyzed the cost savings over time for owning a home.
For analysis purposes, we will look at the total investment value a home can produce for a given set of assumptions. We have previously shown that the income your home produces is the rent you do not have to pay. So we can use expected rent, the purchase price, and expected homeownership costs to calculate the investment opportunity of a home over time.
Let’s use a real world example of Sacramento, CA.
Home Price & Down Payment
Median Priced Home: $189,950
Down Payment: $38,000
Monthly Costs
Monthly Mortgage Payment at 4% interest: $726
Monthly Tax Payment: $158
Monthly Maintenance: $158
Monthly Savings
Monthly Tax Savings: ~$150
Hidden Equity In Mortgage Payment: ~$100
Total Monthly Cost of Ownership: $792
Median Rent: $1,047
Savings from buying: $255/mo or $3060/year
ROI on $38,000 down payment = 3,060/38,000 = 8%
That’s the money you save every year from owning instead of renting. But now that you have an extra $3,060 lying around, you can invest it. The stock market normally returns about 7 or 8%.
Let’s assume:
- You invest the savings at a 5% rate, compounded annually
- Rents go up with inflation at 2%
- The price of your home doesn’t change over time.
Here is what your returns would look like after 30 years (The bump in year 30 is the value of the home, $189,950):
Not a bad way to put away $600,000 over the course of a lifetime, not including the fact that you no longer have to pay a mortgage after year 30.
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