Let’s look at an example of renting vs owning.
For simplistic purposes let’s say you are considering buying a home for $250,000 at 4.25% (current interest rates 2018) on a 30-year mortgage vs. renting an apartment for $1,250 per month. The monthly taxes on the home we will assume are $400/month, insurance $75/month and repairs $2,500/year. Let’s also assume you are going to live in the home for 15 years. Over that 15 years the home will appreciate in value on average 2% per year. Rent on the apartment will also increase 2% per year. Let’s make these other below assumptions:
Own
20% down payment to avoid PMI (private mortgage insurance)
Monthly payment is $980 (principle & interest) + $400 (taxes) + $75 (insurance) = $1,455 per month
Total interest paid at the 15-year mark = $108,000
Balance owed at the 15-year mark = $130,000
Mortgage amount is $200,000 ($250,000 – 20% down payment of $50,000)
House will appreciate to $330,000
Total repairs over 15 years = $37,500
Total insurance over 15 years = $13,500
Taxes over 15 years = $72,000 (assuming no increase, which is highly unlikely)
Rent
Total rent paid over 15 years = $250,000
No repair or insurance cost
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Now let’s dive a little deeper into these numbers. Over the 15-year time period you lived in the purchased house you will have spent $50,000 on the down payment, $70,000 on reducing principal (equity), $108,000 in interest, $37,500 in repairs and $13,500 on insurance and $72,000 on taxes. This is a total of $351,000 out of pocket expenses…. now let’s say you decide to sell your home for the $330,000 it is now worth at year 15. The purchase price was $250,000 so that leaves you with a $80,000 gain…right? Well, sort of. The $130,000 still owed gets paid back to the bank. Leaving you with $200,0000 but you also have to pay back yourself the $50,000 down payment so you are now left with $150,000. Subtract out the interest, taxes, repairs and maintenance you paid of $232,000 and you are left with a loss of -$82,000. Sooo after that longer than anticipated math problem you ended up losing $82,000 over the 15-year time period. Some will say that it is worth the loss because you get to own your home, etc. Some will say the calculation is skewed because homes and rent prices are different across the country. THIS IS JUST AN EXAMPLE, please don't loose sleep over it. Others will say it’s not worth it because of the time value of money (being able to invest the down payment elsewhere). That being said, when renting, it’s a zero sum game, in my opinion. In the example above, as a renter you would have paid roughly $102,000 less over the 15-year time period compared to buying. Regardless, we are all on Bigger Pockets for a reason. Hence, investment property!
