The cost of buying vs renting

The cost of living is one of our largest expenses! So why pay more than you have too? Many people are paying more for rent than what they would if they owned the same house that they lived in. I know a landlord who had the same tenant for decades and said they could own that house now with all of the rent that they had paid. 

What is renting good for?

- Living somewhere for under a year
-No maintenance to worry about


Negatives of renting:

-You are most likely paying more than the mortgage + taxes + insurance would be
-You cannot make the house your own and redo a kitchen or bathroom if you would like to.
-If you want a pet it can drastically limit where you can live.
-You have a landlord some can be great some can be really pieces of work. So this one depends on your situation.
-You are paying someone else's mortgage

Positives of buying:

- You have an asset that will be paid off one day. 
-You are gaining equity (the % of property you own) every time you pay your mortgage. 
-You can choose to rent out the rooms and live rent free.
-If you want a pet that choice is yours. 
-The home is yours to make your own, do projects, redo a kitchen or bathroom. 
-Get to deduct the interest on your mortgage from your taxes!
-The home will appreciate (go up in value) as you own it (based off Philadelphia appreciation values). 
-If you choose to move you can keep it as a rental and have an extra income stream. 
-If you rent it out it could be part of your income when retired.
-If you choose to move you can sell and hopefully you did some work while you lived there or it appreciated. Now you can collect a nice check for living somewhere instead of renting. 

Negatives of buying:

-Higher barrier to entry - need to put more money down
-You are the one responsible for maintenance
-More responsibility

High barrier to entry - by using an FHA Loan putting 3.5% down and a seller's asset the barrier is not that much higher. 

Maintenance - I have done most of the maintenance myself except fixing appliances. Doing the maintenance on most things can be fun projects and you gain a new skill. On appliances you really need a technician. These can be $250.00 costs to fix it. Or I paid $140 for someone to diagnose a problem with a fridge and found it was better just to replace it. I had to spend another $600.00 on that fridge. So the maintenance can be expensive and hopefully with the monthly payment money saved from buying instead of renting that will be saved as reserves. 

More responsibility - The only area I have found owning a home to be more responsibility is in regard to maintenance. But in the places I have rented it usually resulted in me calling the landlord and waiting for him to send someone out. Then I usually fixed it. Now I just call a contractor. Same process different person. 

Real world scenario:

Buyer Bob decides he is going to buy a property on the same street where Renter Rick is going to rent (I know the names are corny but it helps me from mixing the two up.)

(These numbers are based off real market properties. I have worked with buyers on this street as well as rented a home on this street). 

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Buy

-Buyer Bob likes the area he may want to move in a few years but can rent it out or sell when the time comes.


Bob finds a house he likes that is in decent condition for 200k. 

Bob decides to put down 5%, negotiated that the seller pay 6,000 towards closing costs. He ends up to paying 12,000 in closing costs.

+ 615.00 for an inspection
+ 475 for an appraisal out of pocket. 

Bob pays 13,090 out of pocket to move into his home. 

Bob's monthly payment works out to:

$1350/mo with taxes, insurance, and pmi (pmi is an insurance you pay when you put down less than 20%). Bob's interest rate not his mortgage was 4.75% they have gone down since.  

When Bob Pays his mortgage $240.00 of that amount is going towards his equity in the property and increases every month. (Ie: next month he will get 241.00 in equity, usually it goes up 1$/mo) So Bob is increasing his personal net worth every month. 

During tax time Bob gets to deduct the interest paid on his mortgage from his taxes. 

Eventually Bob wants to move he can now choose to rent his home out for 1700 and make a profit of 350/mo (before maintenance and vacancy allowance).

At the end of his loan in he will have an asset worth 200k probably 3x that amount with 30 years of appreciation.

Bob keeps property as rental:

He can use the 350/mo to save for retirement, kids college, lower his new mortgage payment, and or lower his monthly student loan payment. 

Bob Sells:

Bob spent his free time fixing up his home (forced appreciation). Bob has lived there for five years. He has done considerable work to the property and spent 12k in renovations. Which added 25,000 in value to the home. 

His home appreciated over those 5 years also. (Generally homes in Philadelphia appreciate 3-5% / year. I chose the conservative 3%)

​231,854,81 after appreciation
25,000 from renovations Bob did
-174,000 left on loan
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$82,854.81 
- 20k in closing costs
-------------------------------------------------------------
$62,854.81 in TAX FREE profit because Bob lived in the home 2 of the last 5 years. 
​
Bob can tax that profit and put a great down payment on his next home! Or he can choose to do a 5% down payment on his next home and buy a rental property for passive income! 

Rent

​-Renter Ricks chooses to rent because he isn't really sure if he likes the area and may want to move somewhere else in five years.

Homes like these get 1700 a month in rent. Rick went to rent this property and has two pets that is an extra $25 for each pet + a $500 non-refundable deposit. 

​Rick pays 1750 a month in rent for this 3 bedroom house.

Rick pays first, last, one month security, + the pet deposit = 5,750 to move in




Ricks Monthly Payment:

$1750/mo
​


Rick is paying $1750/mo to his landlord.






​
​During tax time Ricks landlord gets to deduct the interest paid on his mortgage. 



















Rick watched Tiger King music videos when he was bored. 





Rick also decided to move and rent again in a new area. 

I almost forgot to mention the rent difference over 5 years!

Bob spent 1350/mo while Rick spent 1750/mo. 

(400/mo x 12 months) x 5 years = That is 24,000 over 5 years! There is Bob's renovation money he spent and then some. 

If Bob chose to house hack and rent the other two rooms for 500 each. He paid 350/mo. 
1750 - 350 = 1400

(1400 x 12) x 5 = 84,000 (before taxes). 

The point is that on the left there is a lot of options Bob can choose from. He can choose to live alone or with roommates and reduce his rent (house hacking). 

When Bob moves he can sell or rent! 

Then the profit from that sale or rent gives him more options. ​

Rick has the option of paying rent that's it. 

I know it seems almost incredulous that this is the gap of renting vs buying but it is real. Buying gives you options which usually people think it ties you down to one place. These are small differences in how you choose to lead your day to day life that can lead to incredible results.