There are going to be a lot of numbers in this blog today. I can’t help it because this is the only way to demonstrate an option that just might appeal to many of you. Here is the question that is driving all the numbers… Is it really possible to rent and end up with more?
Most people make this assessment by comparing a potential mortgage payment to their rent and stop there. This can be wildly inaccurate as many, if not most, of the ongoing expenses of owning a home may not be included in a mortgage estimate.
The average home sold in America today is almost $240,000. If you put down 20% to avoid Private Mortgage Insurance, PMI, you would need a mortgage of $192,000. At 4.5% interest and 30 year term, your base payment will be $975. So how much home could you rent for $975, not much. But let’s look at what that $975 house payment will actually be when we consider your “all in” cost.
Property taxes typically run 2-3% of a property’s value, so we will use 2.5%. Insurance is in the 0.75% range and maintenance and upkeep average 0.5%. Here are the monthly amounts generated by these other cost. Taxes $500, Insurance $150, maintenance $120, for a total of $770. So, how much house can you rent for $1,745?
According to Realtytrac, the average rent to value in 2015 was 0.78% per month which equals a home worth $223,700 or 93.2% of the example home’s value. But let’s look at where the net worth of each will be in 10, 20, 30 and 40 years in our rent versus ownership example. I’m going to use historical averages for real estate appreciation of 3% and the S & P 500 117 year average of 8.7% return for this comparison.
Home Purchase +$29,195 26.4%
3% appreciation to $322,540 Less 9% Closing = $293,511-$153,772 (remaining mortgage) =$139,739
Down Payment invested 48,000 @ 8.7% = $110,544
Home Purchase +$46,003 18.1%
3% appreciation to $433,467 Less 9% Closing = $394,455-$93,867 (remaining mortgage) = $300,588
Down Payment invested $48,000 @ 8.7% = $254,585
Home Purchase ($56,250) (10.6%)
3% appreciation to $582,483 Less 9% Closing = $530,060
Down Payment invested $48,000 @ 8.7% = $586,310
Home Purchase ($637,838) (89.5%)
3% appreciation to $782,899 less 9% Closing = $712,438
Home rental $48,000 @ 8.7% = $1,350,277
Just sayin, this could be right for some!