How Do the Numbers for a Home Purchase Compare to Renting?

Filed under: Market Comentary

It’s been a while since I shared a video on a rent vs. buy scenario. In the real estate business, there is always a mindset: you need to live somewhere – might as well be smart with your spending. If you are going to rent or buy, then let’s look at the numbers and see which one makes the most sense.

These numbers have changed over the years. For example, there have been times when it was so much more expensive to buy (around 2006 when prices were out of control).

Rent vs. Buy Scenario

Let’s look at what the market is doing right now. Today, I picked a $650,000 purchase price with 10% down and an interest rate of 3.375%.

We want to look at the cash flow difference. A mortgage payment stays the same, but I’m calculating in other factors such as 2% per year increase in property taxes and even a small HOA. Rent is going up fast right now, but I am just using a 4% annual increase based on historical trends.

To buy, you’re looking at $3,950 per month. This same house would rent for about $3,750 per month. So, the first year it is cheaper to rent than to buy. Because of the increase in rent prices, the second year is a break-even year (the rent and mortgage payment will be the same). 10 years out, the rent continues increasing while the mortgage stays relatively the same.

Cash Flow and Amortization

Just the cash flow difference comparing a mortgage payment vs. rent over 10 years, the mortgage payment is actually $66,000 less.

The other thing that is critical to understand is the mortgage amortization that is happening – just over $134,000 in 10 years. This equity gain is notable, especially when you consider that appreciation is happening at the same time – which puts it at $515,000 (based on a 5% historical trend for appreciation).

Even if you ignore appreciation, it still saves $66,000 in cash flow over 10 years PLUS you amortize $134,000 in the mortgage.

Coming Up with a Down Payment

I realize that part of the barrier of entry is the down payment. We can run the numbers with different options for the down payment, such as 5% or even 3% down – and it still makes sense.

This is the type of message that I like to share: I love to help people make good financial decisions for the long-term gain. These real estate investments make sense! Reach out to me if you would like to talk about your unique situation.

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