Home Buying Questions

Should I buy or rent a home?  Let's look at the following scenario:

A single women, or man, making $60,000 a year: A couple of years out of school with great prospects for income advancement.  Nether has any immediate intentions to be married (answers a tax question), but do see the possibility of leaving the area in the next couple of years for job advancement.  Their location needs put them in a rental market of around $1600 a month for a 2 bedroom apartment, and $300,000 for a home.  Interest is calculated at 4.2% on a 30 year fixed rate loan.

Let's Rent:

1. Tax Considerations:  A single person making $60,000 per year can expect to pay $6500 in Income Tax (After the $12000 Standard Deduction).  If you itemize deductions and they exceed the Standard Deduction, you can use this amount to reduce income that is taxable.
2. Rental Costs:  Simply multiply $1600 X 12 Months.  $19,200 per year, non deductible.
3. Down Payment (Deposits): 1st, last and damage deposit, $4200.
4. Total Rent and Tax paid per year, $25,770.
5. Maintenance Costs: $0.
6. Disposable income, after housing and tax costs: $34,300.

Let's Buy:   

1. Tax Considerations:  A single person making $60,000 per year can expect to pay $5014 in Income Tax (After the $18,756 Housing Deductions).  You'll itemize deductions now and additional deductions will be available to reduce income that is taxable.
2. Mortgage Costs:  Principal and Interest ($285,000 at 4.2% for 30 years) $1394. Property Tax (est 1.25%) $312. Insurance $100, Mortgage Ins* $256. Total $2062 x 12 = $24,744 per year. 
3. Down Payment (Deposits): 5% of purchase price = $15,000.
4. Tax Deductions: Interest $995, Tax $312, Mortgage Ins $256.  Total $1563 per month or $18,756 per year.
5. Taxable Income after Itemized deductions = $60,000 - $18,756 = $41,244.
6. Tax Savings: $6,500 - $5,014 = $1486 or $124 per month.
7. Housing Appreciation:  Average 6% of value = $18,000 per year.
8. Maintenance Costs: $150 per month or $1800 per year (est).
9. Total Housing and Tax costs paid per year, $24744+$1800+$5014 = $31,558.
10. Disposable income, after housing and tax costs: $28,442.

In this case, disposable income if renting is $34,300, and buying is $28,442.  The difference is $5858 or $488 per month.  When you consider the compounding appreciation of $18,000 per year, $1500 per month, ownership has a $12,000 (on paper) advantage in the first year. 

The factors to consider now, have to do with relocation.  If you believe you will be moving in the next 2 years, you'll need to factor in the costs to sell your home (9%), $30,330 at $337,000.  In this situation, you'd need to subtract closing costs from sale price ($337,000-$30,300) or $306,700.  In this scenario you would have a positive gain of $7,000 over the 2 years.  Depending on the rental market, you may want to consider becoming a landlord and keep the house for investment.  You would have recovered your initial down payment in the sale to use in your new location. 

This case is intended to be informational only.  It is not intended to be a guarantee of performance.  There are many factors that can affect the value of any investment.