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I've read articles where they give figures on when it makes more sense to buy than rent. The thing is, I wonder if it takes into account property TAXES.
1. you rent an apartment for $1500 which you don't get back.
2. You live in a home, such as Seaford where property taxes near $12K/year.
Now with property taxes at $12/K you are throwing away $1K a month, plus interest. Leaving out interest and just seeing what you throw away in taxes is $360,000 over the time of a 30 year mortgage. You paid principle for the home and could sell after 30 years and maybe net zero or continue to live and pay more in taxes.
Now renting you don't pay interest and simply throw away $1500/month. $1500x360months=$540,000 over the same period of a mortgage if rents are not raised.
The difference is $180,000 more thrown away if you simply rent.
Now I understand home ownership is great, but is it really the wealth builder agents make it out to be?
Yes, it is. It's an asset that can give you options. Most of us receive two checks bimonthly and have to figure out how to maximize our income. I have chosen property as a way to achieve this. I pay one set amount for shelter and my mortgage. How can a paid off property yield zero at closing? How much do you think that same apartment will rent for in 30 years?
I do not believe that renting is throwing money away. You are paying for shelter which is important to your livelihood. It also provides flexibility. However, you have to invest in other means to achieve wealth. It is difficult when your income is modest. Many people spend half of their income on rent. If this is true, where do they get the money to build wealth?
Like a poster said, there's a lot of variables. Job stability, where you have to know if you're gonna stay at your job or even in the area you are going to buy in for at least 5 years. The city/area you live in, for example, I live in DC, 1 bedroom apartments go for $1700 per month, and it's not rent controlled. I decided that I was tired of renting, and because it's a buyer's market, I decided to buy in before it was too late. The studio condo I'm getting, I'm paying $200 less, which to you may not seem like a lot, but thats a savings of $2400 per year, and I get the added benefit of deducting my mortgage and interest off my taxes, plus I get the first time homebuyer's credit next year (which is a huge help).
There's a lot of benefits to buying, there's also a lot of benefits to renting, no long term commitment (if you don't count 12 months as a long time), you can move somewhere else when your lease is up, but speaking from personal experience, every month I was paying rent, I might as well have lit that money on fire.
Congratulations! Two hundred dollars is a lot. Good for you. The tax deductible items include property tax, mortgage interest and I believe PMI for people that bought after a certain time period. The mortgage itself is not tax deductible.
What a great rental opportunity down the line, if you choose.
I've read articles where they give figures on when it makes more sense to buy than rent. The thing is, I wonder if it takes into account property TAXES.
1. you rent an apartment for $1500 which you don't get back.
2. You live in a home, such as Seaford where property taxes near $12K/year.
Now with property taxes at $12/K you are throwing away $1K a month, plus interest. Leaving out interest and just seeing what you throw away in taxes is $360,000 over the time of a 30 year mortgage. You paid principle for the home and could sell after 30 years and maybe net zero or continue to live and pay more in taxes.
Now renting you don't pay interest and simply throw away $1500/month. $1500x360months=$540,000 over the same period of a mortgage if rents are not raised.
The difference is $180,000 more thrown away if you simply rent.
Now I understand home ownership is great, but is it really the wealth builder agents make it out to be?
Hi nyliguy,
I am no expert in this field but just sat down to do the calculations for my specific case. Below are the numbers.
Background:
I moved to Long Island 10 years ago and have been doing the unthinkable: renting a house for 10 years in an expensive North Shore area in Suffolk. After the first couple of years, circa 2004-5, I almost lost hope of ever owning.
Here are 3 scenarios:
#1 My actual situation: Losses in paying rent (2002-2011): net loss$250k
#2 If I bought a house for $320k in 2002 with almost 100% financing
#3 If I bought a house for $320k in 2002 with 20% down (64k), got a 30y fixed rate mortgage at 6%
Question:
If I want to buy a similar (same) house today - was I better off throwing away $250k in rent or investing in a house and by how much?
If I went with scenarios #2 or #3, the question is what happens if I need to cash out today (to upgrade or whatever).
It is important to note that 2002 is at the cusp of the bubble - absolutely not worst case scenario.
Assumptions:
3.5% inflation rate per year;
I used approximations of the mortgage amortization tables.
I will assume (property taxes + home insurance) about $10k per year.
I will assume that the house is selling for a similar price to 2002 (*). There are all indications that the house prices on LI are approaching that point (not there yet). I think my post on the LI forum got censored for mentioning this.
Scenario #2: (almost 100% financing, no money down)
Expenses:
purchase costs ($15k in 2002), with inflation: $20k
interest paid (2002-2011)...........................$160k
property taxes + insurance (2002-2011)....... $90k
maintenance/repairs ($3.5k/y).....................$35k
Total expenses:........................................$ 305k
Cost to sell the first house (fees, taxes on profit etc): ... $40k
Note: the amount for maintenance is an underestimate - many things need to be replaced/repaired over 10y, even if no improvements are done. But I took into account that one may save by tax-deductable items.
Cost to sell the first house (fees, taxes on profit etc): ... $40k
Note: the amount for maintenance is an underestimate - many things need to be replaced/repaired over 10y, even if no improvements are done. But I took into account that one may save by tax-deductable items.
Net amount:
Equity - Expenses - Cost to sell = $100k - $373k - $40k = $313k net loss
************
Unless I made some big mistakes, it seems that somehow, unknown to me, I made the best choice of renting for 10 years ($250k) and not buying. The painful part is that highly responsible buyers that put more down in 2002, actually will experience more losses if they sell now. Is not fair.
Disclaimer:
I completely sympathize with all those who own homes purchased in the last 10 years, and I know that they are the majority here.
I simply did not have a choice to buy a house earlier.
I got lucky by going against common sense and switching 2 major expenses in a way that no sane person would: I paid in full for my kids college w/o pre-saved money: about $200k, and now I am looking for a house. I also had a non-working husband for the last decade, so just me.
Last edited by 2011littlehouse; 10-08-2011 at 06:22 PM..
Hi nyliguy,
I am no expert in this field but just sat down to do the calculations for my specific case. Below are the numbers.
Background:
I moved to Long Island 10 years ago and have been doing the unthinkable: renting a house for 10 years in an expensive North Shore area in Suffolk. After the first couple of years, circa 2004-5, I almost lost hope of ever owning.
Here are 3 scenarios:
#1 My actual situation: Losses in paying rent (2002-2011): net loss$250k
#2 If I bought a house for $320k in 2002 with almost 100% financing
#3 If I bought a house for $320k in 2002 with 20% down (64k), got a 30y fixed rate mortgage at 6%
Question:
If I want to buy a similar (same) house today - was I better off throwing away $250k in rent or investing in a house and by how much?
If I went with scenarios #2 or #3, the question is what happens if I need to cash out today (to upgrade or whatever).
It is important to note that 2002 is at the cusp of the bubble - absolutely not worst case scenario.
Assumptions:
3.5% inflation rate per year;
I used approximations of the mortgage amortization tables.
I will assume (property taxes + home insurance) about $10k per year.
I will assume that the house is selling for a similar price to 2002 (*). There are all indications that the house prices on LI are approaching that point (not there yet). I think my post on the LI forum got censored for mentioning this.
Scenario #2: (almost 100% financing, no money down)
Expenses:
purchase costs ($15k in 2002), with inflation: $20k
interest paid (2002-2011)...........................$160k
property taxes + insurance (2002-2011)....... $90k
maintenance/repairs ($3.5k/y).....................$35k
Total expenses:........................................$ 305k
Cost to sell the first house (fees, taxes on profit etc): ... $40k
Note: the amount for maintenance is an underestimate - many things need to be replaced/repaired over 10y, even if no improvements are done. But I took into account that one may save by tax-deductable items.
Cost to sell the first house (fees, taxes on profit etc): ... $40k
Note: the amount for maintenance is an underestimate - many things need to be replaced/repaired over 10y, even if no improvements are done. But I took into account that one may save by tax-deductable items.
Net amount:
Equity - Expenses - Cost to sell = $100k - $373k - $40k = $313k net loss
************
Unless I made some big mistakes, it seems that somehow, unknown to me, I made the best choice of renting for 10 years ($250k) and not buying. The painful part is that highly responsible buyers that put more down in 2002, actually will experience more losses if they sell now. Is not fair.
Disclaimer:
I completely sympathize with all those who own homes purchased in the last 10 years, and I know that they are the majority here.
I simply did not have a choice to buy a house earlier.
I got lucky by going against common sense and switching 2 major expenses in a way that no sane person would: I paid in full for my kids college w/o pre-saved money: about $200k, and now I am looking for a house. I also had a non-working husband for the last decade, so just me.
Wow! You have gone to a great deal of trouble to rationalize your decision to rent. Don't feel sorry for us. Some of us are doing okay. Not all of us are underwater. I don't feel any regrets in owning and you should not have any regrets in renting. Good luck to you in your future endeavor.
Wow! You have gone to a great deal of trouble to rationalize your decision to rent. Don't feel sorry for us. Some of us are doing okay. Not all of us are underwater. I don't feel any regrets in owning and you should not have any regrets in renting. Good luck to you in your future endeavor.
You maybe right, goodlife, it may be rationalizing to some extent. I had viewed myself as a loser on this front after 2004 or so, so imagine my surprise when I ran the numbers.
The truth is that I am a rather analytical person and want to know why, how and more - want to make informed decisions and won't buy into seller's pitch easily. Good thing, I had no choice in 2002.
This is no advocacy for renting (just a caution to stay informed) - obviously, I am looking to buy, and am rooting for the responsible buyers/homeowners.
Hi nyliguy,
I am no expert in this field but just sat down to do the calculations for my specific case. Below are the numbers.
Assumptions:
3.5% inflation rate per year;
I used approximations of the mortgage amortization tables.
I will assume (property taxes + home insurance) about $10k per year.
I will assume that the house is selling for a similar price to 2002 (*). There are all indications that the house prices on LI are approaching that point (not there yet). I think my post on the LI forum got censored for mentioning this.
Scenario #2: (almost 100% financing, no money down)
Expenses:
purchase costs ($15k in 2002), with inflation: $20k
interest paid (2002-2011)...........................$160k
property taxes + insurance (2002-2011)....... $90k
maintenance/repairs ($3.5k/y).....................$35k
Total expenses:........................................$ 305k
Cost to sell the first house (fees, taxes on profit etc): ... $40k
Note: the amount for maintenance is an underestimate - many things need to be replaced/repaired over 10y, even if no improvements are done. But I took into account that one may save by tax-deductable items.
Cost to sell the first house (fees, taxes on profit etc): ... $40k
Note: the amount for maintenance is an underestimate - many things need to be replaced/repaired over 10y, even if no improvements are done. But I took into account that one may save by tax-deductable items.
Net amount:
Equity - Expenses - Cost to sell = $100k - $373k - $40k = $313k net loss
Scenario #2 - You're missing the massive amount of PMI you're going to be paying since you're putting almost nothing down. There's no way that Scenario 2 is going to beat scenario 3 on losses.
You get to write off your interest every year with buying which you don't with renting (if it exceeds standard deductions or if you have other good stuff to write off).
There's also a great program for first time homebuyers in some areas called the Mortgage Credit Certificate that gives you 15% of interest paid back as a tax credit (you still write off the other 85% as normal). If your area has this (mine does), it's really great to look into.
It depends on what your interest rate is, how much you're putting down and what all the numbers add up to, but either way unless you're paying with cash, you're gonna be bleeding some money whether you buy or rent. It's just up to you to figure out if you're gonna be bleeding more buying or renting.
We're looking at getting a place around $300k with about 6% down at 4% interest using that mortgage credit certificate program. After calculating all the numbers with the mortgage, PMI, taxes, hazard insurance, and the MCC tax credit and comparing it with a COMPARABLE rental, we're still bleeding money by buying but half as much as renting. Comparable meaning the same or a very similar neighborhood with access to similar quality schools, similar square footage, beds/baths, and lot size. Obviously the longer you keep the house you buy the more buying will have advantage over renting (as you'll be shifting from paying more interest to more principle over the years).
Scenario #2 - You're missing the massive amount of PMI you're going to be paying since you're putting almost nothing down. There's no way that Scenario 2 is going to beat scenario 3 on losses.
Good point - about the difference in #2 and #3.
I intentionally ignored PMIs for simplicity, but yes - that can add another $20k or so to case #2 over 10y. They still remain pretty comparable, though.
You get to write off your interest every year with buying which you don't with renting (if it exceeds standard deductions or if you have other good stuff to write off).
Yes, if you do itemized deductions. I intentionally reduced expenses on repairs and maintenance allowing for some tax-deduction benefits.
There's also a great program for first time homebuyers in some areas called the Mortgage Credit Certificate that gives you 15% of interest paid back as a tax credit (you still write off the other 85% as normal). If your area has this (mine does), it's really great to look into.
Thanks for this information! Did not know about that and will look into it.
It depends on what your interest rate is, how much you're putting down and what all the numbers add up to, but either way unless you're paying with cash, you're gonna be bleeding some money whether you buy or rent. It's just up to you to figure out if you're gonna be bleeding more buying or renting.
We're looking at getting a place around $300k with about 6% down at 4% interest using that mortgage credit certificate program. After calculating all the numbers with the mortgage, PMI, taxes, hazard insurance, and the MCC tax credit and comparing it with a COMPARABLE rental, we're still bleeding money by buying but half as much as renting. Comparable meaning the same or a very similar neighborhood with access to similar quality schools, similar square footage, beds/baths, and lot size. Obviously the longer you keep the house you buy the more buying will have advantage over renting (as you'll be shifting from paying more interest to more principle over the years).
The key is long-term!
No question, that eventually, it pays off to buy. It pays off also in other non-financial aspects.
But many (including myself) have not realized that short-term, even if it's 10 years, one should have no illusions that buying a house is a safe investment - it's risky as any other investment.
I did not bother to bring up inflation/increase in tuition for example. The way I spent these $200k+ was unexpectedly good. Again, not by choice. Come to think of it, probably would have been best to let the kids cover that themselves and now I could have paid in cash - lol. Builds character.
PMI at that level is not insignificant. Assuming a lender allowed you to put down nothing, that's $3,200 that gets rolled into the loan for upfront PMI, so you actually have a higher interest cost. Another $36,480 gets spent over the next 10 years on monthly PMI since you're in the highest bracket for monthly PMI payments.
At $3,648 a year for PMI, that's basically the amount it cost me to rent a 2 bed/2.5 bath 1400 square foot apartment in a highly desirable area for two months in Orange County, CA. I dunno about you but throwing away 2 months rent is crazy! In some areas of the country, that's probably more like 4 months of rent.
Also, even though I sound like I'm for renting, at least for my area, the houses I want to buy simply beat the comparable apartments or homes I would rent. The MCC helps eat some of those losses. In my example of what we're buying (even paying PMI), it's about $10,500 average per year lost over 5 years...$9,700 a year lost on average if you stay 10 years. In our case, at year 2 we'd likely make extra payments to get that PMI removed. In this case, with the PMI removed the total monthly payment will be in the $1700s. After probably 5 years we'd turn the home into a rental to keep paying down the loan, maintain the home and have something that fits us better. Homes in this neighborhood comparable to the one we're looking at rent for about $2,100 a month.
For reference, my current rent is $22,800 a year for a comparable home in the same neighborhood. From my experience with renting in the area, if we're lucky rent only goes up by about $50/year. So if you're looking at a 5 year plan, you're looking at paying $25,200 on year 5. That's a whole lot more money lost per year than buying for us.
Depending on your income levels and where you live, there may be programs and grants to help with down payments or closing costs. Read the terms closely but there are some that can definitely offset some of the negative costs of buying (the MCC program and the CHF Platinum grant to name a few, but you may have your own local ones).
Wow! You have gone to a great deal of trouble to rationalize your decision to rent. Don't feel sorry for us. Some of us are doing okay. Not all of us are underwater. I don't feel any regrets in owning and you should not have any regrets in renting. Good luck to you in your future endeavor.
We have a house and our mortgage with taxes is the same as the rent of a crappy appartment across the street.
We prefer the house.
It's kinda nice.
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You maybe right, goodlife, it may be rationalizing to some extent. I had viewed myself as a loser on this front after 2004 or so, so imagine my surprise when I ran the numbers.
