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Is Renting that Bad?
By admin | June 17, 2008
I am getting married in two weeks and we made a conscious decision to rent rather than buy for our first place of living. I do not want people renting their whole lives but I do think both have usefulness.
Is it better to rent or to buy?
This is sort of an age old debate, whether you should rent for your living space or whether you should take the plunge and buy. Come to think of it, this is not really a debate because you can put concrete numbers down for each situation and find out what comes out ahead.
I am going to talk about this because I recently stumbled upon a cool “Is it Better to Buy or Rent” calculator that I have had some fun with. The way I talk about issues is what I would do in others’ shoes and I will show my work behind what I say.
Let me first say the implications (pros/cons) of each situation:
Renting - Cons
- You do not get any tax break and all rent paid is a straight expense
- Usually a smaller space than what you could get if you bought.
Renting - Pros
- You are not responsible for repairs in your living space (in most cases)
- You are not responsible for property taxes or homeowners insurance (just renters, much cheaper)
- Normally it will benefit your cash flow situation seeing that there will be less going out each month
- Utilities are much cheaper
Buying - Cons
- Cash Flow might leave you tight because of a high monthly payment
- Responsible for repairs, property taxes, homeowners insurance (can get expensive)
- Might require high upfront payouts besides your down payment (closing costs, furnishings, etc.)
Buying - Pros
- Part of your payment will be building equity in the house (I feel like some readers may not know what this means so I will take a second to explain it.)
If your monthly payment for your house is $1,000 part of that payment is interest expense and the other part is building equity or principle. Interest expense is just what goes to the bank as what they are “making.” The other portion of your payment builds equity by making the loan balance lower and lower. During the first few years the majority of your payment will be interest because you have a higher loan (i.e. 6% on 150,000 is more than 6% on 100,000).
- The interest that you pay is tax deductible when you file your taxes. This does not mean you get all your interest back, what this means is if you pay $8,000 in interest in a year that will reduce what your income was for that year by $8,000. The net effect of this is it will save you $8,000 times your tax bracket amount.
- Property taxes is tax deductible as well.
- Usually more space than what you would get for renting
- Will appreciate over a long period of time (short term depends on the market)
Okay I have laid out most of the implications that go into this decision. Now I get to say what I would do (and am going to do).
My mini-plan is to rent for a year, possibly 2 years, until I have a HUGE down payment. And when I say huge I am going to get on intensity mode and build that thing because I do not want to pay much interest fees. (it is cool because according to my situation the rent vs buy calculator above agrees with me)
Why would I not just buy and try to pay extra on the house then? Glad you asked. It’s all in the numbers.
If I had a house the expenses would look like:
$1,000 payment + $100/month homeowners insurance + $100/month accrued property taxes + $150/month in extra utilities costs + $100/month for upkeep
= $ 1450/month
however…you will get approx $300/month back after tax deductions from interest exp, homeowners ins, and taxes
= $ 1150/month
you would also have built about $1,800 in equity in your house that year ($1,800/12 months = $150/month)
= $ 1,000/month
So after all the smoke clears and you get your tax return back owning a house will end up costing about $1,000 a month AFTER all the pro’s and benefits.
Now with renting my monthly expenditures would b:
= $ 660/month
Leaving me a net of $340/month that I can set aside and accrue interest for my big down payment in a year or so. Now keep in mind these #’s change as you pay off more principle/equity in your house and home owning is smarter in the long run. So, what I personally plan on doing it staying a year or two in a renting situation that owning for the rest of my life because when you own those first two years with 100% financing you end up losing according to the numbers.
Topics: Investments |
June 17th, 2008 at 7:57 pm
Dead on analysis! One other thing to consider is any opportunity where you can live FREE. I have had two friends do this for a couple of years, and MAN did it allow them to accrue a HUGE down payment.
What did they do to obtain free housing? One was a college dorm supervisor. Another oversaw a large piece of land.
Again - great read!