Renting Vs Buying a home??

Question

Is it really better to buy a home? My husband and I were playing with some figures and were quite surprised to see we are better of renting after for a 5 year period. We don't intend on owning the home after 5 years.
We live in the state of GA where real estate appreciation has been relatively slow but steady compared to other regions( about 6-7% annually).
We will be saving about $1250 mthly if we rented a fairly new 4bdr, 2.5 bath home , which equals $75,000 over a 5 yr period and that is more if we factor a 5-10% return depending on how we choose to invest the money ( about $87,000- $100,000).
If we buy a $300K home, our payments will be about $2750 including PITI. If it appreciates at 6 % yearly, after 5 years we'll have a home valued at $401,500. Assuming we sell for that high, our net profit after agent commission of 6% and 3% closing costs will be about $65,000.
It seems like a slam dunk to just upgrade and rent a nicer home. Are we missing something in this figures?

It make me wonder what the big deal is about buying, especially since people move so often this days. But I keep feeling I might be missing something in this analysis, because why else will people be so bent on home ownership, especially in an area like GA where we don't have the crazy 20-50% appreciation like other regions.

I thought about thetax credit, but I was told the credit is usually small unless you have a really expensive home or are making a lot of money.

Answer 1

This is an excellent question and one which everyone starting our should address with care.

As your calculations make clear, the answer depends on the housing and rental markets in your home area and will differ widely across the spectrum.

I may be missing something but yes I think you are missing something in your figures.. You say you save 1250 a month renting and later you say your payments for the 300,000 house are 2750 . since you save 1250 a month then this 2750 must be a monthly payment? If so it involves a monthly repayment of the debt incurred to buy the house as well as interest on the debt.? you need to look at your mortgage document and see how the payment breaks down into principal and interest.

When you calculate your profit on the house you must take into account the amount of debt repaid. As an example let us say that your mortgage is for the entire 300,000, interest 6.5 percent. Your 2750 per month [33,000 a year] pays interest decreasing each year as the principal is reduced i.e 19,500 reducing and repays 13,500 increasing. In 5 years you have paid off say 75,000 [using an average of 15000 a year as the repayment portion of the 2750 increases]. When the house sells for 400.000. your gross profit is 400,000 less the remaining debt of 225,000 or 175,000. Deduct 9% closing costs of 36000 and you are left with 139,000 not 65,000.

you may have overlooked the possibility that rents will increase over the period as the renters costs increase?

I did not include tax relief on the interest portion of the 2750 as only you know your own tax bracket, but this will increase the gain on your house sale by its accumulation over 5 years and does not appear to be included in your considerations...

I used crude figures to make the point , but you can work it out exactly using your mortgage repayment schedule and your tax relief. That 2750 a month is not all expense and your 1250 rental difference is therefore not all savings.

you will note that in my rough example the 1250 a month savings of 75000 over 5 years that you calculated, matches my estimate of your savings ie debt reduction while repaying the mortgage. That these numbers should be related is not surprising. Rents must be related to house prices and maitenance costs. The person renting had to pay for the house and maintiain it out of his rents. There are of course anomalies in this relationship in timing and current markets. Sometimes anomalies will produce a bargain for renters and sometimes not.

The necessity for the renter to meet his own expenses is a warning to check your figures carefully if the advantage seems too great..

In any event principal repayment is a vital figure in your analysis which it appears you may haved missed.

There are financial and pyschological factors to consider in the decision making.

House appreciation, possible rental increases, investment return, are not easily predictable.

Psychological factors include the advantage of forced savings in debt repayment versus the voluntary saving and investing of cash retained. Investing requires more than one may think in discipline, analysis and unflappability.Difficult for the beginner. The desire to own is kind of basic to most of us.

You are asking the right question. Good luck with your ultimate answer, but it is not a slamdunk..

Answer 2

2

Answer 3

It is not surprising. It is a myth that buying is always better.

Buy vs. Rent.

As housing market slump, it is easier to calculate "Rent vs. Buy" scenario. Because "appreciation" is no longer a factor.

Mortgage payment consists of two parts: interests and principal. Interests are like rent, which doesn't add to the equity to your house. It simply disappear as your pay it.

If interests portion of the mortgage payment is roughly equal to rent of equivalent property, then it is a decent buy.

For example, let's buy a $500,000 condo with 0% down and apply interests only loan (just like renting a place). Mortgage payment would be $3250/month. It is a bad buy, because you can enjoy same property for $2000/month.

Please note that I assume the tax benefits from home cancel out fees from home association and property tax. For more accurate calculation, consult with your CPA or accountant. But NOT your realtor, whom will say anything to get the deal to go through.

And again, if you like a particular property, then paying more may be reasonable. You are the only person who can decide how much more premium you are willing to pay.

Answer 4

I love owning a home because I can do anything I want to it, in it, and in the yard, without anyone to tell me I can't do it. It's more than just money for me, it's the dogs, the apple trees, the bathroom I tiled myself...We rented for 5 years and it was great, but I've been to georgia, and you could get a pretty nice house there for $200,000, which would drop your monthly payments significantly from a $300,000 house. The equity you build really does add up, plus it's an investment in the future.

Answer 5

Personally I like the fact of owning a home. However, consider this. When renting, your renting from a corp. or individual who assumed all taxes etc. When you own a home, your basically renting it from the school district, Federal Government, and if applicable, a drainage district. Either way, we all are just renting!

Answer 6

You didn't include the tax deduction for home mortgage interest, but maybe you are better off renting.