To Rent Or To Own… That Is The Question

Rent_or_Own

In 2007 and 2008, property values nationwide dropped dramatically in sympathy with the banking crisis, mortgage crisis and the stock market crash. Never before had values of residential real estate fallen so far, so fast and in so many places. It seemed that one of the staples of American wealth was a lousy place to invest money.

During those brutal times, many investment advisers started suggesting renting a home was the way to wealth. Their theory was that if you invest your down payment money in equities, you would have piles of money in 20 years. Rubbish! These recommendations always come from people who broker your money into equities and are backed up by dubious math.

Some Simple Arithmetic

Let’s look at buying a $175,000 home — and renting one of comparable value. In most areas of the country, due to the down market (although values have had a nice rebound over the last seven years) and very low interest rates, your payment to own will be less than the rent for a comparable home.

If you bought a $175,000 home and put $8,750 down and negotiated the seller to pay most of your closing costs, you could get into this home for around $10,000 total investment. Your 30-year mortgage for $166,250, at 5 percent, would produce an $892 monthly payment. Taxes of $200 and insurance for $70 gives you subtotal payment of $1,162. Because you put less than 20 percent down, you will also pay mortgage insurance until you hit that 20 percent equity. This will give you a total payment of about $1,232.

Rental markets vary, but in most areas of the country a $175,000 home will rent for $1,300 to $1,600. Let’s use $1,400 — or annual payments of $16,800 — with nothing to show for it but receipts. If you lease homes for 20 years and rents increase even a little, you will pay approximately $360,000 in rent and have nothing but rent receipts.

Consider These Variations

If you bought the home with the numbers described above, what might your situation look like? In 20 years you will have paid $295,680. You will owe $88,000 on your mortgage balance. But what if you had used the $1,400 that a home like that would rent for and paid down your mortgage balance by an extra $168 per month? In 20 years, your mortgage balance is only $18,500 — so your payments have created equity and wealth.

Print Friendly, PDF & Email

Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

Share This Post On

Submit a Comment

Your email address will not be published. Required fields are marked *