Am I wrong about renting vs buying?

Question

Ok so I'm just trying to think in advance. So I just finished residency and signed an offer for a position to be making 330,00 a year. After taxes, insurance deductions etc Ill be taking home 190k a year. Now I signed an offer for 2.5 years. And I really want to buy a house. I understand you should rent a house first to test the water and make sure you like the job etc etc. Now in the the event that I buy a house I kind of want your opinion on this.

My understanding is that most people don't buy a house and sell it less than a year after buying because they don't have enough equity. But lets compare renting vs buying. Lets say I rent a house 1.5k a month for 2.5 years, that equals to 45k that goes right down the drain that I will never get back. Total net loss 45k...…

On the other hand, lets say for example I use a physician loan with 3.75% interest with no down payment and buy a house for 250k. Monthly mortgage is about 1.5k a month and tax is about 5.5k per year Closing cost that buyer pays is about 3k. Now lets say 2.5 years from now I want to sell it. Lets say house value went down and it is now with 240k and I decide to sell it for 240k I've put in about 45k into the house through mortgage from monthly payments. Take out the closing cost from the original purchase. Take out the 16k in taxes that I paid. Take out the 10k difference in the value that I lost and the 15k in interests Take out 14k in commission fees from selling the house. I have a net loss of about 15k vs the 45k if I were to rent a house.

Am I getting this wrong. If so can someone steer me to the right direction if so?

Ash Ab · Answer

Ahh that makes sense. I forgot that not all of the mortgage goes to equity. Thanks

Patrick Menefee · Answer

@Ash Ab $1500 mortgage for 2.5 years, just like your rent.

As Kent said, go look at an amortization schedule and plug in additional payments like you’re asking about. You can see how little of your mortgage payment goes to equity at the beginning.

Also, when I reread your post I think there’s a disconnect on your payments. In your math at the end you talked about tax, interest, etc. your $1500 mortgage payment will include those as well as insurance. Your payment includes what you’ll hear often as “PITI”-principal (equity), interest, taxes, and insurance. It sounds like you assume your monthly payment goes straight to equity, and you pay the rest separately. In reality, about $300 of that $1500 payment will go to equity in the beginning.

Ash Ab · Answer

@Patrick Menefee

Where did you get the 45k mortgage payments at the end there? And also if I were to increase my monthly payments towards the house to 6k per month. Would that change anything?

Kent Hall · Answer

Find an amortization calculator online and plug in the numbers, that will show you the miscalculation.

You will see that early in the loan the vast majority of the payment is going to interest, not toward principle (equity).

Patrick Menefee · Answer

@Ash Ab

I’m not sure where exactly you’re getting some of your numbers but I think you’re misunderstanding the amortization schedule. If you stayed in the property longer or rented it out after 2.5 years it would make sense, but you build so little equity at the beginning of your mortgage that you’d be taking a huge loss.

Over 2.5 years...

Renting: $1500/mo rent = $45k

Buying: $62k (see below)

Purchase-$3k cash, $250k mortgage (probably will incur additional origination fee on a 0 down loan that will increase principal, but let’s be optimistic)

Holding costs-$45k (mortgage payments, let’s round up to $14k of it to equity)

Sell for $240k to pay back remaining $236k mortgage, $14k commission, $3k closing cost - you owe $13k when you sell

Total = $62k ($13k selling costs + $3k purchase closing cost + $45k mortgage payments)

Kelly DeWinter · Answer

Your numbers are wrong, your purchase loss would be =(mortgage interest+tax basis)+1st closing costs+deprecation+commission+2nd closing costs+seller subsidy+home inspection repairs+cost of any improvements+non rental property associated costs