In the classic and ongoing argument of benefits for renting versus owning, advocates for home ownership always say that when you own a home, you're paying yourself every month and building equity. What they neglect to take into consideration is that with the money you save by renting, you could be paying yourself a whole lot more.
Keep reading for a full breakdown of an example family and how, if they rented instead of owned, they could actually wind up significantly better off financially in just ten years.
Let's Consider an Example
The Smith family buys a home for $200,000 in 1998, putting $20,000 down. Ten years later, thanks to a boom in the market, their home is now worth $350,000. That means their home appreciated at a fairly standard rate of about 5% per year.
While the Smiths got a few tax breaks thanks to their home ownership, they also had to pay about $2000 a year in property taxes, $2000 a year for insurance, and about $200 a month or $2400 a year in maintenance, repairs and house upkeep. In addition, their utility bills cost them roughly $100 a month or $1200 a year and, of course, interest on their mortgage.
With a 7%, 30-year mortgage, an assumed inflation rate of 3.5%, and their appreciation rate all taken into consideration, the Smiths paid approximately $107,000 to live in their home for 10 years.
Use of a Rental Calculator
Now, a basic rental calculator will tell you that had the Smiths rented a comparable home for $1200 a month, plus about $2000 a year for utilities and insurance, they would have paid approximately $157,000 to live in their home for 10 years.
What rental calculators don't tell you is what would have happened had the Smiths invested their $20,000 down-payment in a modest mutual fund or GIC (Guaranteed Investment Certificate) and put their extra $800 to $1000 every month into other low-risk investments. Well, let's find out.
Comparing Against Other Investments
Even if they had put their money in a modest high-interest savings account or GIC at just 4% and contributed just $800 a month, saving the rest for fun and entertainment, they would have a nest egg worth almost $157,000 after ten years.
Subtract that modest investment income from the Smith's rental living costs for the last ten years ($157,000) and you'll quickly see the Smiths actually broke even. Had they diversified their investment portfolio or made more aggressive investments, they could have even made money.
Remember, while buying a new home may be appealing. You have to do the math, especially if you're considering purchasing in a market that's depreciating or not appreciating at a healthy rate. Though homes historically appreciate at a fairly steady rate, this is not an inevitability. In a down housing market, homeowners and home investors can actually lose.
Certainly owning a home has many of its own great advantages, not the least of which include relative freedom to do what you want with it, investment potential if you've bought prudently, and greater control over the home's longer-term costs. But if your primary concern is with the overall financial value, don't discount renting a house as a viable option.
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