Rent vs. Own

While interest rates remain low and rents are increasing, it is more cost effective to purchase an Academy District 20 home in today’s market than it is to continue renting.

This Rent vs. Own analysis was completed several years ago. Though the dates are old, the data is still valid.

Years ago we worked with a good friend and client that wanted to buy their retirement home in Colorado Springs. Believe it or not, after 24 years with the Air Force, they had never bought a home. It is understandable why they didn’t buy during their career, for one thing they moved on average every 2 years making it difficult to build equity before having to sell. That is why many military officers own more than one property around the country. I’ve known officers to buy a townhome at every assignment, having 6 properties when they retired. It is a great way to build wealth. I think you will agree after reading this Rent vs. Own analysis.

The example used throughout this analysis is for a single family home with estimated taxes of $1200 per year. The loan is a conventional 30 year fixed with 5% down and monthly payments of $1500 the first year for rent or mortgage. Actual loan costs will vary depending on the lender and terms of the loan.??In today’s market, interest rates are lower than they’ve been for years. The chances of the rates going down more are slim, but they can quickly go up. So we started with an interest rate of 5% and increased this rate keeping the payment at $1500 per month.

At 5% interest rate, a $1500 a month mortgage payment can finance a $234,500 mortgage. At 5.5% the loan value is $223,100 and at 6.0% this loan value goes down to $212,500. At 6.5% the loan value is $202,500. One thing to remember is that when the economy improves, mortgage rates and the price of the homes will most likely go up. So for the same $1500 per month payment, you will end up with “less house” (in size and/or condition) than if you bought now. This argument alone should convince you, but WAIT, there’s more….

Loan Comparisons

123 Main St 123 Main St 123 Main St 123 Main St
5% Down 5% Down 5% Down 5% Down
Sales Price: $234,500 $223,100 $212,500 $202,500
Down Payment: $11,725 $11,155 $10,625 $10,125
Total Loan: $222,775 $211,945 $201,875 $192,375
Note Rate: 5% 5.5% 6.0% 6.5%
Payment: $1,196 $1,203 $1,210 $1,216
Property Taxes: 100 100 100 100
Haz. Insurance 59 59 59 59
MIP/PM1 Ins. 145 138 131 125
HOA 0 0 0 0
Total Payment: $1500 $1500 $1500 $1500
Years on Loan: 30 30 30 30
Close Date: 1/31/2011 1/31/2011 1/31/2011 1/31/2011
Est. Cash Required: $16,935 $16,256 $15,626 $15,031
APR Rate: 5.124% 5.629% 6.135% 6.642%

If you continued to rent the home, you can expect the rent to increase annually, a conservative estimate is 5% per year. A fixed mortgage remains at $1500 per month until it is paid off after 30 years in this example. The chart below shows how the rent will increase over 15 years on the same home, while the mortgage remains stable.

Are you curious about the last two lines in the chart below? After making adjustments for tax disadvantages of renting (not being able to deduct the mortgage interest you pay), when you rent a home for $1500 per month, it is like paying $2,989. When you own the home and take advantage of the tax benefits, it is like paying $1,298. But WAIT there’s more….

Rent Payment vs Home Payment

Rent vs home payment

Now, we need to take into consideration appreciation on the home. In today’s market we are seeing depreciation in many Colorado Springs neighborhoods, but on average, homes in Academy District 20 continue to appreciate. See our Housing Analysis by School District. Prior to 2007 we saw an average of 6% appreciation for homes in Academy District 20. So, using a very conservative estimate of 3% we see that the equity in the home increases modestly over time. In fifteen years the same $234,500 home is estimated to be valued at $365,341. With the remaining loan balance of $145,465, this difference/profit is $181,021. Imagine what the profit would be if appreciation is 6%. But WAIT, there’s more…

Home Equity

Home Equity

Cash spent on housing over 15 years is probably the most compelling chart. On the same $1500 house with 5% increasing rent, you can expect to pay $379,069 out of pocket for housing. This includes the tax disadvantage of renting. The owner of the same home can expect to pay $56,679 over the same 15 year period with the tax advantage of owning. This is why you hear the term “to build your wealth you need to own.” But WAIT, we have one more chart.

Total Cash Spent On Housing

Total cash spent

If you can afford to pay an additional $100 toward the mortgage principal each month (this would be in addition to the $1500), you could pay off the loan in 25 years and 3 months, saving over $75,514 in interest payments. If you increased the additional principal payment to $200 per month, the payoff would be 21 years and 11 months saving $101,026. After your mortgage is paid off early, think how you could put that extra $1600 or $1700 per month to work for you. Maybe you would consider investing in a rental, and let the renter help pay off that mortgage. Whatever you decide to do, a mortgage will probably be involved in some way or another. If you want to buy a house, it might be worth checking out to learn more about the process. This is completely optional though, just do what feels right for you.

Amortization Schedule

If you are in a position where you can’t purchase a home just yet, but would like to Rent now and purchase your rental in the near future, contact us. We have a Rent to Own program where an Investor purchases the home for cash and rents the home to you for up to five years. For more information see Rent to Own in Colorado Springs.

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By Nancy Murray

Murray & Associates, Keller Williams Colorado Springs