In this article, I am going to tell you something you already know or may think you fully understand. It starts with this question—is it better to rent a home or buy? The overwhelming response to that question seems to be that it is better to purchase a house instead of renting one.
Although I’m sure you answered 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 our Maximum Potential calculator I am going to illustrate rent costs over a 30 year time period, assuming that your initial rent is $1,000 a month and there is 4% inflation on rent in your area. As shown below the total amount of rent checks you will write over this 30-year span is $673,019.
If you were to purchase the exact same house, instead of renting, let’s say the price would be $360,000. In the current economic environment, we could get a loan rate of 4% on a 30-year mortgage, with a $60,000 down payment (20%). Using the Loan Analysis calculator we see the following:
The most glaring issue is that the monthly payment is initially about 40% more expensive: $1,432.25 versus the $1,000 monthly rent. If we limit our vision to just the initial monthly cost, then renting is cheaper. But you’ll notice that the total amount paid when mortgaging the house is $515,609. Oops, looks like purchasing is cheaper.
So are we really comparing apples to apples? Well, let’s consider all the other factors at play. 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 occurs for most household issues. In some cases, the landlord takes care of the landscaping, including lawn mowing. So we must consider repair costs and other maintenance fees a homeowner might encounter in this equation. Oh, and don’t forget property insurance and property tax.
Using the same Maximum Potential calculator we can calculate how much these additional expenses will cost. Please note that in the annual income (which functions as annual cost in this scenario) I put the total monthly cost of the property tax, insurance, and repair, i.e. $375. I then multiply that by 12 months to get $4,500. The following is the result:
So on top of the mortgage, there is an additional cost of $252,382 for maintaining the house, bringing the total to $767,991. We must also consider the down payment, which was not factored into the loan analysis calculator. In this scenario, let’s say you decided to avoid private mortgage insurance, so you had a down payment that equaled 20% of the purchase price, or $60,000 of the $360,000 total. When you add that down payment, purchasing a house now costs $827,992, versus renting a house at $673,010. At this point, it looks a bit more expensive to purchase a house than to rent.
With a lot of variables, it might seem hard to know which option is the best. Luckily, with 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 for 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? As I said, I am telling you something you already know. It is better to purchase a house than to rent it, from a financial point of view.
Consider some other reasons people feel that buying a home 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 that can be accounted for using the calculators.
3) Equity build-up that we get back when we sell the house.
4) Emotional fulfillment and pride from ownership.
5) Control of the asset; you can make changes to the house as you see fit. You can put up a new wall, take one down, paint, nail, etc.
6) You can borrow against your equity!
You’re probably asking yourself, why was this article even written? Everyone knows that purchasing a home is better than renting.
Here is the heart of the article: purchasing life insurance is better than renting it. Permanent life insurance will serve you better than universal or term life insurance can in the long run. Why is whole life better? For all the reasons this article has pointed out and then some.
And the bonus I promised? Well, 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