Despite the constant drone of Realtors® and their claims that “now is the time to buy.” at current prices in South Florida, it is nearly always better to rent than it is to buy.
Let’s consider the following example. Let’s compare renting this 2/2.5 townhouse in Pembroke Pines (Realtor.com link). You can rent this unit for $1275 per month. Assuming that you pay $25 a month in renter insurance, your total monthly cost to live in this unit will be approximately $1300.
Instead, you could buy the identical unit for $254,912 (two doors down). Your monthly cost on this unit would be:
Mortgage = $1,611.22 (Assumes a 6.5%, 30-year fixed loans)
Homeowners’ Association Fee = $101.00
Property Tax = $321.93 (Based on the current assessment with homestead exception)
Insurance ≈ $200.00
Less Federal Tax Deductions = -$246.90 (Assumes a 15% incremental tax rate)
Total monthly cost after the Federal tax advantage = $1987.25
That’s a $687.25 difference. Why in the world would you buy this rapidly depreciating asset when it is so much cheaper to rent?
Suppose you rent this property for 5 years and invest the difference into a money market earning 4% per year. At the end of 5 years, you’ll have $45,563.97 in cash.
Subscribe to:
Post Comments (Atom)
Stumble It!
9 comments:
That makes too much sense...
But at what point should I look to buy. Is there a certain break point? If it would be cheaper to rent am I always better to rent?
Any help is appreciated...
In my opinion, as long as it is cheaper to rent after figuring all the variables into the equation, then it's better off to rent -- at least fron a financial perspective. Still, there is certainly an intrinsic value in "owning" your own property.
What is that intrinsic value? I think the the intrinic value of "owning" depends on many personal factors that varies from person to person. I have seen many authors place the value at 10%. In other words, when the monthly expenses of buying a house falls to 110% of the monthly rent expenses, it may be a good time to buy.
On the other hand, one could argue that it's always bad to buy in when prices are falling like we have now. Fortunately, there are many market indicator that show when a market is falling. I will be discussing those indicators in future posts.
Yeah, but I probably won't be able to get a home loan by the time you say it is the right time to buy. What then?
My lease is coming to end this Fall, and I want to OWN my own home. Should I sign a year lease again for my apartment? I would hate to miss the prime opportunity to buy and get stuck in my apartment for another year. There seems to be a lot of homes for sale out there and some seem to have been on the market for a long time. I know you say I should still rent, but for a whole year??
In this example, what would the home price be to equal what rent I would pay?
All these examples use very short terms. If you look out 15 - 25 years, and your mortgage is paid off, owning Real Estate will be better than renting. At that point, you don't have monthly mortgage payments, but paying rent goes on and on and on forever...
"All these examples use very short terms. If you look out 15 - 25 years, and your mortgage is paid off, owning Real Estate will be better than renting. At that point, you don't have monthly mortgage payments, but paying rent goes on and on and on forever..."
You're correct; my examples do use short terms. However, my examples are using current data -- data that will change significantly over the next few years.
Here's the facts: At **current** rental rates and **current** purchase prices, it's is MUCH better to rent than it is to buy.
It hasn't always been that way. Back in 2001 and earlier, it was much better to buy than it was to rent. I fully expect the current situation to change. If my predictions on the market are correct, in about 2 years, it will once again be better to buy.
Note that in no way am I advocating anyone to spend a lifetime renting. I think potential buyers should watch the market closely. They should keep doing buy versus rent comparisons. When the market corrects itself completely, then they should buy, but not until then.
I'm glad you're not taking a one sided approach that I see so often with these blogs. People forget that everything moves in cycles and after every boom, there is a bust. This bust will take time to shake out, but who knows how long? It's always best to buy when the guns are blasting and everyone is selling. Timing the market ups and downs is not easy. How will you know when the market corrects itself completely?
"I'm glad you're not taking a one sided approach that I see so often with these blogs. People forget that everything moves in cycles and after every boom, there is a bust. This bust will take time to shake out, but who knows how long? It's always best to buy when the guns are blasting and everyone is selling. Timing the market ups and downs is not easy. How will you know when the market corrects itself completely?"
I definitely do NOT take the one-sided view. Personally, I think residential real estate, when bought at the right time, can be the best investment an individual can make.
In future posts, I will discuss the factors we should watch for to determine when we've reach a bottom. I do not think that predicting peaks or valleys in residential real estate is tough.
In the mean time, do not fret; the bottom is probably two years away. Furthermore, residential real estate moves very slowly (especially compared to other investments). You don't have to worry about missing the trough because the trough will probably last two or three years.
Post a Comment