Renting Versus Buying - All About the Money

There are several ways to think about renting versus buying. Conventional wisdom might say that buying, and therefore owning, a home is always better. However, your situation may be different. Before you jump in the buying pool, consider how the costs might stack up for you.

How to think about housing. 

Say that you are moving to a new city and cannot decide if you should rent or buy. Think about this scenario:

If a home is on the market for rent for $1500, or $18000 per year and that fits your monthly budget, but an identical house in the same neighborhood is for sale for $400,000. Do you rent or do you buy?

• If you buy a house, you will make a down payment. For ease of calculation, you put down $100,000.
• Also, you must take out a mortgage for the remaining $300,000 for thirty years fixed.
• For simplicity, assume you get your mortgage for six percent.
• Every month you pay your mortgage bill of about $1800, and it includes both interest and principal. Using an amortization calculator, you will see that for the first year about $1500 per month goes toward interest and roughly $300 goes to pay down the mortgage. While these change year over year where the amount toward interest goes down and the amount toward principal goes up, it stays around the $1500 interest to $300 principal for the first several years, so it works for our comparison.

In our comparison, during the first year, you will pay $18,000 for rent, and you will also pay $18,000 in mortgage payments. Now is when the calculations get trickier.Potentially, you will have savings on your income taxes for the interest paid. The way that works is that you subtract the amount of the interest paid from your entire gross income. After all your other deductions, you may end up with a few thousand less in taxes due. So, for this year that might be (hypothetically) $3000. That means your annual home cost is now down to $15,000. However, you also had to pay property taxes. To be conservative, calculate that at 1% or $4000. That puts you at $19,000. You also had to pay homeowners insurance. A conservative number for that is about $200 per month or $2400 per year. Your costs now equal $21,400.

One more calculation to consider is that the $100,00 you put in as a down payment you would still have as an investment if you rented. If you just kept it in a savings account with a 2% return, you would have an annual income of $2000.

So, for this year, as a renter, your effective outgo would be $16,000 compared to $21,400 for you as an owner. These numbers do not account for any maintenance, repair, or upkeep expenditures you have as an owner.

In this scenario, dollar for dollar, owning might not be your best choice. However, dollars are not the only reason to buy. Talk to your real estate professional about the intangibles of home ownership, before you decide.