There has been a lot of talk lately about renting housing vs. buying lately, especially in light of the article from folks in Dallas who said they lost about $60K by buying vs. renting and re-investing the difference. Some key points in reference to that article:
- Their time to own was very short (about 43 months). The general rule is only buy if you are planning to be there for 5+ years
- They are assuming that they would have invested the extra money, but you can’t always assume that. Many folks find other ways to spend the money they save on renting instead of buying rather than investing it.
- They are “backward looking” in regards to the amount they could have made. When they purchased in late 2015, nobody could predict the markets would shoot up like they did. In fact, many people were expecting a recession in 2017. If they had bought before the 2000 market crash, then they’d be patting themselves on the back.
An important update to most rent vs. buy is the 2018 tax reform act, which got rid of a lot of tax write-offs for home ownership (property taxes, mortgage interest. Etc.) for a generic $12K single/$24K for married couple. The result is that it gives that same benefit whether you buy or rent – so it makes renting more cost effective than before.
To do a real analysis on whether you should rent or buy, you are going to have to dig into the numbers and make some assumptions. Based on how those assumptions bear out, Its possible your numbers might come out differently, but they shouldn’t be too far off – provided no major market crashes or dot.com fueled jumps up in value.
This example comes from Focus on Personal Finance, by Kapoor, Dlabay, Hughes & Hart. I’ve shown the pre- and post-2018 tax reform.
- Apartment has rent of $1,250/month
- Home costs $200,000
|Rental Cost||Before Tax reform 2018||After Tax reform 2018|
|Annual Rent payments||$15,000||$15,000|
|Interest Lost on security deposti (amount of security deost times after-tax savings account interest rate)||$36||$36|
|Total Annual Cost of Renting||$15,246||$15,246|
|Annual mortgage payments||$15,168||$15,168|
|Property taxes (annual)||$4,800||$4,800|
|Homeowner’s insurance (annual)||$600||$600|
|Estimated maintenance & repairs (1%)||$2,000||$2,000|
|After-tax interest lost on down payment & closing costs||$750||$750|
|Growth in equity||($1,120)||($1,120)|
|Tax savings for mortage interest (annual mortgate interest times tax rate)||($3,048)||$0|
|Tax savings for property taxes (annual property tax times tax rate)||($1,344)||$0|
|Estimated annual appreciation (1.5%)||($3,000)||($3,000)|
|Total annual cost of buying||$14,806||$19,198|
As I stated, the tax reform act certainy makes it look like renting is better. Another thing to throw in here are the purchasing costs. Typically, you are going to spend 5%-8% of the home costs ($10-$16Kk if above home) for fees, points, commission, etc. to purchase. To evaluate this, you would spread these costs over the lifetime of the home (i.e. the longer you stay in, the less it will be per year).
Is it any wonder why fewer people are buying homes, and more people are renting in this society?
Mr. 39 Months