As a young pup REALTOR®, I watched and helped parents from Chicago, in particular, buy properties for their children to live in as they attended school. I’ve also watched and tried to assist adults get out of the renting cycle. For some reason, it seems so much safer to rent than to buy. When I ask what makes a first time buyer so nervous, they generally say the same thing: I’m afraid I’ll lose money when it’s time to sell. So let’s take an honest dollar to dollar look at the renting versus owning proposition.
Let’s suppose a person is paying $750 per month in rent for a two bedroom condo, with plans to live in the rental unit for at least three years. The total amount paid in rent is $27,000 over that three year period. There are no property tax or interest payment deductions. At the end of the lease period, the renter walks away free and clear after paying $27,000 in rent.
Contrast this to a person who purchases a 2 bedroom condo for $110,000. At 4.0% interest and a 100% mortgage, the monthly payment breaks down as follows:
$525 Principal and Interest
$103 Property Taxes
$ 67 Homeowner’s Insurance
$ 90 Mortgage Insurance
$785/month x 36 months equals $28,260 spent in house payments
At the end of the third year, the principle balance will be $103,948, and the approximate interest deducted on income taxes each of the three years would be $4,272 per year, for a total of $12,816 over the three year period. You’d also be able to deduct property taxes each year, roughly $1236 per year, $3,708 for the three year period.
The difference between three years of rent and three years of house payments is ($1,260). Adding together the interest and taxes paid over the three year period, $16,524 times 25% tax bracket equals a savings of $4,131 in Federal Income Taxes paid.
Safely assuming the seller sells in three years for $115,000, minus the principle still owed of $103,948, the difference is $11,052. Approximate costs to sell, including the REALTORS® commission equals $7490, and difference from $11,052 is $3,562. Add that to the $4,131 in income tax savings and over three years (and subtracting the $1,260 difference between rent and house payments) and the benefit to own is approximately $6,433 compared to having spent $27,000 in rent with no benefits. Using this apple to apple scenario, there’s a $33,433 swing between owning and renting. The housing market would have to turn so upside down to lose $33,000 on a $110,000 condo, that selling a condo would be the least of anyone’s problems. Even in the down market of the last five years we didn’t see that type of decline. And there’s plenty of room in this swing for minor household repairs or improvements.
Housing is an emotional subject, but as a REALTOR® it’s my job to look at real estate from the perspective of you investing your dollars. Just as we look at what is the best use of the land, which is under us all, we also look at real estate as an investment – an investment in normal times that does not depreciate but typically appreciates.
My business survives because of you: your kind words and your wonderful referrals. If you personally know of anyone thinking of buying or selling, send them my way and I’ll take good care of them! If you are in contact with people at your workplace who are in contact with people newly moving to town, I’d appreciate you putting my name out there. I work hard to earn your trust and respect, and like anyone else, I appreciate loyalty. You’ve been great!
As always,
Terri
