It’s important to remember that the purchase or rental of a home is a lifestyle choice as much as it is an investment. It is not just a commodity to negotiate, but also the place you’ll come home to each day and make your own. Yes, it is important to buy wisely and stay within your means. It is equally as important to do what is right for you and your lifestyle now. If you know you’ll be staying in the same place for years to come, you have much more latitude than you would if you might need to relocate in the next couple of years.
As you evaluate your options, you’ll want to consider things like initial out-of-pocket expenses, monthly expenses, maintenance and upkeep costs, tax deductions, and appreciation.
Initial out-of-pocket expenses.
In a home purchase, this is the down payment & closing costs. Depending on the loan program and purchaser’s credit rating, a typical down payment is 5-20% of the purchase price with closing costs (loan, title and escrow fees) adding another 2-3% on top of that. Putting 20% or more down allows you to avoid the added cost of mortgage insurance. If you need to put less down, you can remove the mortgage insurance later when you have 20% or more in equity.
In a rental, this is typically first month’s rent plus security deposit.
BUY: A $500,000 home with 10% down would cost $65,000 ($50,000 down and $15,000 in closing costs) in initial out-of-pocket expenses.
RENT: A $3,000 per month rental might cost $6,000 (first month’s rent and security deposit).
In a home purchase, this is the mortgage payment (including property taxes, homeowner’s insurance and any mortgage insurance). In a rental, this is typically just the rent.
BUY: A $500,000 home with 10% down works out to a $2,084 base mortgage payment on a 30-year fixed mortgage. Add around $500 in property taxes, $50 in homeowner’s insurance and $290 in mortgage insurance (if applicable) for a total of $2924 per month.
RENT: $3,000 per month.
One important consideration is that the base monthly payment in a purchase of a 30-year fixed mortgage does not increase (although the property taxes and homeowner’s insurance will). Rent will likely increase each year to keep pace with inflation. Over time, the amount paid in rent each month will typically become significantly more than the amount of a mortgage payment.
Maintenance and upkeep.
In a home purchase, you are responsible for everything from the roof to the foundation, plus the land, utilities and sewer lines. In a condo, you are individually responsible for the interior of your unit and collectively responsible for the entire structure and grounds. The cost of maintenance depends on the age of the home or condo, how well it was built and maintained, and its exposure to the elements. In a rental, the landlord pays for maintenance and upkeep.
BUY: Plan for 1-2% of the home’s value per year in typical maintenance plus the cost of major components (roof, furnace/AC, paint, flooring, appliances, decks, etc.) based on their life span. These items are easily researchable via inspectors, contractor bids and even google searches.
RENT: Landlord pays for maintenance and upkeep.
In a home purchase, your investment is leveraged. That means you gain appreciation based on the entire value of your home, not just the amount you put down. That’s like earning interest on $500,000 even though you only deposited $65,000 in the bank.
BUY: A 4% appreciation rate is a good average to benchmark. Assuming a 4% rate of appreciation per year, our $500,000 home would gain $108,000 in value over five years.
RENT: The landlord gains the appreciation.
The bottom line.
There’s a lot more to consider than just the monthly outgo. A homeowner can maximize their investment by purchasing in a highly desirable area and completing timely maintenance and upgrades or they can waste away their equity by purchasing in a declining or over-built area and allowing their home to fall in disrepair.
Only you know you. Are you up for the pleasure, independence, headache, and heartache of owning your own home? Or would you prefer the comfort and ease of renting someone else’s home with no strings attached, even if it costs more over time? Building wealth through homeownership is an incredible opportunity—but it’s only worth it if you enjoy the ride.
Looking back at the numbers, here’s how a 5-year analysis might pencil out:
BUY: Your $500,000 home costs about $65,000 in initial out-of-pocket expenses, about $180,000 in monthly payments, and $40,000 in maintenance and upkeep over 5 years for a grand total of $285,000. In our scenario, this is offset by $108,000 in appreciation for an estimated net cost of $177,000 over five years.
RENT: An initial $3,000 per month rental would cost $194,988 in rent payments over 5 years assuming a 4% rent increase each year (a good long-range, though very conservative, benchmark, given the double digit rent increases over the past several years).
So, there you have it. The decision to opt for home ownership is a lot more than a quick judgement call. To do it right, you have to consider all of its aspects—financial, emotional, and even physical and spiritual—and weigh those against your long-range goals and plans. By taking the time to do a thorough analysis of the numbers and an assessment of yourself, you’ll make the best decisions possible and avoid costly mistakes.
Still have questions? Contact one of our knowledgeable brokers for assistance with how to determine your best sale price based on both the average and median price trends.
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