In this article, I am going to tell you something you already know, or sort of. To make sure I need you to answer a question; Is it better to rent a home or buy? The overwhelming response to that question is it better to purchase a house instead of renting one.
Although you answered the question that it is better to purchase a home, I am going to use Truth Concepts calculators to prove it to you. Don’t stop reading because you think you know it all. Stick with me and I am sure you will like the results. Plus there is a bonus idea at the end if you read it all.
Using a Maximum Potential calculator I am going to illustrate your rent costs over a 30 year time period. I am assuming your initial rent is $1,000 a month and there is 4% inflation in rent in your area. As you see below the total amount of rent checks you will write over that time is $673,019.
If you were to purchase the exact same house let’s say the purchase price would be $360,000. In the current economic environment, we could get a 4%, with a 20% down payment ($60,000), 30-year mortgage. Using the Loan Analysis calculator we see the following:
The most glaring thing you will notice is that the monthly payment is initially about 40% more expensive, $1,432.25 versus the $1,000 a month rent. Looks like to me if we limit our vision of the problem to the initial monthly cost then renting is cheaper. But then you notice that the total amount of mortgage checks for purchasing the house is $515,609. Oops, looks like purchasing is cheaper.
Wait a minute are we really comparing apples to apples? No, of course not, when you are renting and the toilet springs a leak what do you do? Call the landlord and they come and fix that leak. A similar process happens with every other problem with the house. In some cases, the landlord takes care of the landscaping including mowing the lawn. So we need to think about repair costs as well as other maintenance fees. Oh and don’t forget the property insurance and property tax.
Using the same Maximum Potential calculator we can calculate how much you will spend on these items. Please note in the annual income (really a cost in our story) I put the total monthly cost of the property tax, insurance, and repair, i.e. $375. I then multiply that by 12 to get the $4,500. The following is the result:
So in addition to the mortgage, we have an additional cost of $252,382 for purchasing a house, bringing the total to $767,991. We also have to consider the down payment. Like I assumed you decided to avoid private mortgage insurance so you came with 20% or the purchase price or $60,000. At this point, it looks a bit more expensive to purchase a house than to rent. (Purchase is $827,991 versus renting $673,010.)
With a lot of variables and issues, it might seem hard to actually know which is the best. Luckily at Truth Concepts, we have a calculator to help us out. (Really do we need to KNOW if it is cheaper to buy a house versus renting? We already know it is better to buy. We know because everyone knows that.)
The Real Estate Analysis calculator is useful in our current situation – evaluating the purchase of a personal residence. When you enter the numbers from above and click on the “personal residence” button right above the ROR box, you get the following:
Are you surprised by the result the calculator helps us to arrive at? Like I said, I am going to tell you something you already know. It is better to purchase a house than to rent it, from a financial point of view.
Let now consider some other reasons people feel that buying is better such as:
1) Appreciation of the asset over time, that we enjoy as the owner.
2) Tax advantages that we have not discussed, but the calculator allows us to account for them.
3) Equity build-up that we get back when we sell the house.
4) There is an emotional sense of pride from ownership.
5) Control of the asset. In other words, you can make changes to the house as you see fit. You can put up a new wall or take one down, paint, nail etc.
6) You can borrow against your equity!
You should be asking yourself, why is this article even written? Everyone knows that purchasing a home is better than renting.
Here is the heart of this article: Purchasing life insurance is better than renting it. (Whole life versus UL or term.) Why is whole life better? For all the reasons this article has pointed out and then some.
Now for the bonus, I promised: Can you see a new way to use our awesome software to help your clients see the WHOLE truth about financial decisions?
-Jason Henderson for Truth Concepts