Should You Rent or Buy a Home? Advice on Renting vs. Buying

Posted by Steve Vincent on Jan 22, 2014, 4:51:50 PM

In Buyers, is it better to rent, real estate appreciation, real estate tax deductions, Rent vs. Buy

Thinking personDeciding whether to rent versus buy a home is more complex than it looks.  On the surface, the decision to rent an apartment for $1,000 a month or buy a home with a total monthly payment of $1,225 is easy!  Take the apartment and save $225 a month!

But what many renters don’t understand is that there are benefits over and above the joy of ownership that go along with being a homeowner.  Let’s look at these less obvious benefits in just two areas:  appreciation and tax benefits.

 Appreciation

The point about owning real estate is this:  it appreciates.  It gains in value over time.  It is true that we recently came through an adjusting period where values dropped.  But taking a broad look at real estate values indicates that the value of property traditionally rises over time.

Zillow recently did an analysis of housing prices aimed at gaining an understanding of what ‘normal’ appreciation is.  They looked at prices across the country for the period 1985 - 1999. They stopped at 2000 because they believed that’s where the housing bubble began to grow, distorting appreciation rates.  Of course the opposite happened after 2006, so those years were eliminated as well.  Analysis of their fifteen year target period demonstrated a historical appreciation rate for the nation of 4.4%.  North Carolina metro areas were very close to that as well (you can research current market activity, including recently sold homes, by zip code here).

What this means is that a $200,000 home bought today in a normal appreciating market might be worth $208,800 a year from now.  That’s an $8,800 gain in value added directly to the homeowner’s equity.

Now consider the fact that that $200,000 house is likely mortgaged and the appreciation factor becomes even more impressive.  Let’s assume that the homeowner bought the home with 5% down:  $10,000.  Appreciation is based on the value of the home, not the amount of cash the homeowner had to invest to buy it, so in theory, that 4.4% appreciation rate will recover all but $1,200 of the homeowner’s initial investment that first year!

Tax Benefits

To qualify for a $190,000 mortgage for that $200,000 house would probably require annual income of about $70,000 (find out for yourself here).  True, there are many other factors that go into mortgage loan qualification, but let’s keep it simple.  A married couple with a child and that kind of income is probably paying $10,500 a year (+/-) in federal taxes (about 15%).

But, when they buy that $200,000 home, every bit of interest paid on the mortgage becomes deductible. So does any property tax paid.  A $190,000 30 year fixed rate mortgage at 4.3% with a payment of $1,275 will produce $8,170 in interest deductions the first year.  If property taxes are $2,500, that brings total deductions to $10,670.

In their 15% tax bracket, that deduction will reduce the amount of federal taxes this couple will pay by about $1,600.

Now, remember, our total payment (including taxes and insurance) on the $190,000 mortgage was $1,225 per month.  Applying the annual tax savings we just estimated against this payment makes our actual housing expense about $1,091 a month:  $91 more than renting.

 To summarize:Rent Versus Buy A Home

  • You make a $10,000 down payment but, if historical appreciation rates hold true, you will get all but about $1,200 of that back in appreciation the first year!
  • You will be making monthly payments that are $225 more than renting in this example, but when you apply the offsetting tax deductions you’ll receive as a result of owning and having a mortgage, you’re effectively paying just $91 a month more!
  • In five years, if historical appreciation rates hold, your $200,000 home will likely be worth about $248,046.  Your mortgage balance will be about $172,669 which means your equity (the difference between the value of the property and what you owe) will be about $75,377!
  • Subtract your original $10,000 investment and the additional $91 a month you paid over the five year period, and you will have netted almost $60,000!  This is how Americans build financial security for their families!

Isn't it time you closed the door of your apartment and called The Vincent Group at GreatNest to help you make the best financial decision you will ever make?  We're here to help!

Click here to search homes for sale in Greensboro, or here for High Point and here in Winston Salem. If you'd like to model some what-if scenarios we have mortgage calculators available here.