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Rent or Buy? The news is getting better!
One of the most common questions of renters is "rent or buy?". The answer changes over time. For a long time in San Diego, home prices went up so fast that it was an easy decision. Buy anything that you could afford and gain huge sums in equity. More recently, prices stablized and it came down to comparing rent to the cost of home ownership and renting generally won out.
Now that we are in the middle of a market meltdown, things have changed again. Some factors to consider are:
- How does rent compare to mortage, property tax and other payments?
- If you buy now, are prices likely to go up, down or stay the same?
- How will payments change over time?
- Do you want to own?
How does rent compare to mortage, property tax and other payments?
It may be easiest to see the tax savings with an example. This is not meant to be tax advice, is not guaranteed, etc., etc., but is intended to give you an idea and some things to talk to your CPA about.
Let's say Pat earns $50,000 a year and is paying $1500 a month on rent. Pat's real estate deductions are, well, zip. No deductions for renting. Pat buys a condo for $225,000 putting 10% down and the rest on a 6.5% mortgage. Pat's mortgage payment is about $1280, of which about $200 goes to principal and the rest to interest the first year.
Pat's tax deductions for the first year look like this:
| Mortage Interest | $13,095 |
| Property Taxes | $2,812 |
| Total write-off | $15,907 |
| Pat's total tax rate | 31% |
| Pat's tax savings | $4,931 |
Pat will save $4,931 in taxes! That works out to be about $410 per month.
Let's look at Pat's total costs:
| Costs per month | Renter | Homeowner |
| Rent | 1,500 | 0 |
| Mortgage | 0 | 1,280 |
| Property tax | 0 | 234 |
| HOA | 0 | 200 |
| Total per month | 1,500 | 1,714 |
| Tax savings | 0 | 410 |
| Net cost | $1,500 | $1,304 |
Even though Pat's payments are higher with homeownership, the savings will be almost $200 a month when taxes are considered!
If you buy now, are prices likely to go up, down or stay the same?
Will prices in general go up or down over the next year or two? No one knows for certain. Over a long period of time, home prices have risen. The key in the short term is does it matter?
Prices have come down - a lot. They needed to. With a little shopping and a good Realtor, there are some fantasic deals to be had. If you plan to stay in San Diego, say for 5 years or longer and can buy for what it costs to rent, it does not matter what happens next year. It only matters if you can get your money back or or better yet make a profit 5 years out. Rents are going up. If you can buy for less than the amount of rent, you can theoretically rent the property out and hold it forever, making a little money each month. There is no doubt, prices will rise - it's just a matter of time.
How will payments change over time?
One advantage to owning is that if you buy using a 30 year mortgage, you know that your payment will never go up. How about rent? How much was your rent 5 or 10 years ago? Do you think rents will stay level or go down over the next 5 or 10 years?
Some people have objections to home ownership. It is a big commitment. Contrary to popular belief, banks really do want you to make the payments every month. If the toilet stops working it is your problem to fix. Do you need to feel like you can drop everything and move at a moments notice?
For most people though, home ownership is welcomed. No more landlords. No rising rents. Want to paint your kitchen orange? You can. Home prices may go up and may go down, but you know for certain that the rent money is gone forever.
Find out if you would be better off renting or buying. Contact us by email at info@TeamBelew.com or by calling 619-920-8909. There is no obligation, just honest answers.