Is Renting a Costly Mistake?
Are you on the fence about home buying? Are you postponing home ownership in favor of renting to have greater flexibility and to avoid dealing with maintaining a property? While these are benefits of renting, they can come at a cost. Over time, this cost can significantly hinder your ability to build wealth and damage your overall financial well-being.
To demonstrate this point, let’s compare an average renting situation to an average home buying situation.
Renter Bob prefers to rent in order to save money for a down payment and to also have the flexibility to move when he wants to. In addition, he doesn’t want to deal with the headache of maintaining a home (mowing lawn, fixing plumbing, hot water heater, garbage disposal, etc.). He pays $1,700 per month in rent for 10 years.
Here is the breakdown of his financial situation..
Monthly Rent = $1,700
Number of months = 120
Total Rent Paid (with annual 3% raises in rent)= $234,000
Change in Net Worth = -$234k
Home Owner Suzie:
Home owner Suzie decides to purchase a home for $340k in the same neighborhood as Renter Bob. Suzie continues to make her monthly mortgage payments and 10 years down the road sells her property for $457k (3% annual appreciation).
Here is a breakdown of her financial situation..
Down payment: 20% -- $68,000
Loan Balance: $272,000
Loan Terms: 30 year fixed @ 4% annual interest
Monthly Payment: $1,623
Equity Build Up over 120 months: $57,708
Gain in property Value: $457k-$340k= $117k
Total Gain in Equity = $175k
Estimated Interest Paid over 10 years less tax deduction (25% tax rate) = $73,590
Estimated Taxes Paid over 10 years less tax deduction (25% tax rate) = $30,000
Brokerage commissions to Sell (5.5%) = $25k
Estimated expenses for repairs & insurance (0.75%/year) = $2,550*10 = $25,500
Total Expenses = $154k
Change in Net Worth = +$21k
Difference between Suzie’s net worth increase and Bob’s net worth decrease = $255k
After looking at these numbers, I’d much rather put up with the repairs, and sacrifice a little flexibility if it meant that I would be over $250k richer 10 years down the road!
At this point, you may be wondering, “Well this is all great, but how do I come up with a 20% down payment?!” My answer to this is - there are many other financing options available for home buyers. For example with an FHA loan, you can put a minimum of 3.5% down and get a 30 year fixed loan with a low rate. To learn more about this, click here.
Stop making someone else rich with your monthly rent payments! In addition to the scenario above, there are many other benefits of owning real estate. Click here to learn more.
What does your schedule look like this month? Let's set up a time to talk more about these financing options, along with various strategies to build wealth through real estate.
Looking forward to it!