Archive for April, 2008


Rent or Buy?

April 16, 2008

Recently, I was asked by a friend why we had not bought a house yet.  I am working part time to help make ends meet while I finish up school.  We still put away money for retirement, we put away money to cover any sudden large expenses we might have, and we put away money to cover expenses and lost income when we finally have a child.  Even with all that, we still put money away towards a down payment on a house.  It’s not a large amount right now, but we have a few expenses, like a car payment, that will be going away soon, so our saving rate will increase when that is over.

So, we are making more money than we spend, and we save that money.  We’re in a decent position financially.  Yet, we’re not buying a house, why is that?

Note:  These numbers are obfuscated a bit to not reveal too much information about my life.

First, let me guesstimate that the condo we live in would sell for $400,000.  Searching for a loan, I found one at 5.75% APR if we put 20% down on the $400,000 loan (which we do not have right now.)  That works out to be a $2,334 a month house payment.  That is significantly more than we pay now, like around 150% more than we pay in rent, not including condo fees which we don’t have to pay now.

But we save money on taxes because of the interest, right?  Sure we would.  The first year of the loan, we would spend ~$18,000 in interest.  That’s $7,300 more than the standard deduction for a married couple.  Since we are in the 15% tax bracket, that would save us a total of $1,095 a year in taxes.  Even if we were in the 25% tax bracket, we would save $1,825 a year.  So, I could spend ~$7,000 more a year on the place I live to save $1,825 a year in taxes.  This is also the most I’ll ever save on taxes because of the interest, too, since you pay less and less interest every year.

But what about the equity you gain?  Well, with that same loan, you pay about $4,100 on principle.  So, we would have increased our equity in the condo by that amount.  So, we’ve saved $1,825 on taxes and built up $4,100 in equity for a grand total of $5,925.  We still haven’t reached that $7,000 of extra cost yet, though.  The only way to make it up is to hope that the condo increases in value.  Over the long haul, it will go up.  However, there is no guarantee that in the next 5 or 6 years it will go up in value significantly, no matter what real estate people try to tell you.

Let’s assume the condo does go up a few percentage points in value over the course of the year.  That would put the buying ahead of renting in money terms.  However, I’ve only talked about the good parts of home ownership.  There are more costs associated with owning a house than with renting.  Renters don’t have to pay to replace appliances.  They don’t have to pay for upkeep.  All I have to do is call my landlord, and she is obligated to fix it.  Renter’s insurance is also less than homeowner’s insurance.  Oh, and I don’t have to pay property tax.  That saves me $2,900 a year right there.

Frankly, unless we move somewhere lower in cost and more inconvenient for us, there isn’t a large monetary incentive for us to buy a house.  Think about it, do people that own houses really have a lot more money lying around?  I’ve never really seen any evidence of this.  In fact, I’ve seen a few people that were house poor, and we actually had more disposable income than they did.  For now, I’m happy renting, and until we make more money, renting is at least as good of an option as buying, if not better.