Not everyone wants to be a real estate investor. For that matter, not everyone wants to own a home of any kind. And that is okay. Some people just don’t want to be “tied down” or have to deal with a leaking water heater or have to take the chance on replacing a roof. I get that.
But for those of you who are still wavering between buying and renting and are wondering how the current market plays into that decision and whether or not it is worth it and…
Let’s just lay it all out there for you so you can make up your own mind.
Here is our scenario: A house in Kansas City that costs about $140,000 will rent for about $985 in most of the area. Some areas will be higher, some lower, but those will be our numbers. The house is a 3 bedroom, 2 bath with a 1 car garage. In reasonable condition. And we are going to project that you will either rent there for 8 years or own there for 8 years. That seems to be about the average length of time a home owner stays put. Renters will move more often but will usually move into another rental house or finally buy a home. So those are the rules.
We’ll start with the renter because the numbers are more simple. Starting rent will be $985/mo. We’ll raise the rents approximately 5% every other year. Years 3-4 will be $1025/mo. Years 5-6 will be $1075/mo and years 6-8 will be $1125/mo. Sound reasonable?
At the end of the 8 years you will have paid to your landlord $101,040. And the good news is you didn’t have to shell out any other expenses for repair type items.
Taking the $140,000 house we are going to say that you are going to get a 100% loan. (I’m not for these. I’d rather you have a minimum of 3% in the house, but in this case, a 100% loan.) The first 80% of the loan you will get at 6.5% amortized over 30 years. Your payment will be $708/mo P&I. The additional 20% you are amortizing over 15 years at 9.0%. Your payment will be $284/mo P&I. You do have to account for taxes and insurance. Both of those will rise over the 8 years. Averaging out what I think they will be you will have an additional $285/mo to T&I. Therefore, your monthly payment will be $1,277/mo. PITI.
Over that same 8 year period you will pay PITI of $122,592.
That is $21,552 more than if you rented.
Now we have additional factors we have to take into account. Over that 8 year period you will have paid in interest alone $72,170. Home interest is deductible on your Schedule A of your taxes. If you are at the 28% tax bracket you will have seen a tax savings of $20,207 over those 8 years.
Now the difference is still in RENT’s favor, but only by $1,345 over the 8 years.
Another thing to think about is principal reduction. Over those 8 years each month you paid your mortgage some of that money (at first a very small amount) went towards reducing the amount of money you owe on the house. Using an amortization table you will find that the principal reduced adds up to $23,046.
The difference is now in OWN’s favor by about $21,701 over the 8 years.
Still one more factor to take into account. Appreciation. There was a lot of talk about appreciation the last few years. Now the talk is about lack of appreciation. Here in Kansas City, we see neither the great ups, or downs. My zip code (66062) appreciated 6.6% last year while my best friend’s zip code (66224) appreciated 9.3%. However, Waldo & Brookside (64114) depreciated 2.5% and where I grew up (66212) depreciated 1.9%. (Source is Kansas City Star.)
Historically, the Kansas City housing market appreciates at 5% a year. But for our purposes, we are going to use a yearly average appreciation of 3%. 8 years at 3% per year appreciation (on average) will make that $140,000 home sell for about $177,000. That is a $37,000 gain.
Now OWN’s favor is by $58,701.
It is fair to say that after 8 years there will be deferred maintenance that will have to be caught up. So subtract from OWN $4,500 for carpeting, $1,000 for appliances, $5,000 for painting and $5,000 for miscellaneous.
You are still left with an advantage to OWN by about $43,201.
There are, obviously, multiple variable and unknowns. The market could go south like some gloom and doomers believe. It wouldn’t surprise me at all if we stay flat this year and next. Real estate goes in 7 year cycles. Look it up. Some people would have had us believe the last stock market run-up of the ’90’s and the real estate boom of the 2000’s wouldn’t end. It did. Now we are to believe that the market will never rebound. We’ll see. For all I know the market could really take off next year. Or remain the same. I don’t really know. Neither does anyone else.
Another factor is lifestyle. As I stated before, perhaps you just don’t want to own. I’m good with that. I’ve sold duplexes where the tenants have been there (I am not making this up) 30 years, 24 years, 17 years and 12 years. They liked what they had and didn’t see any reason to do anything different.
The bottom line is, it is your individual decision. There is the math, if you are on the fence. Let me know if you have any questions.