I recently had the pleasure of working with a 61-year-old man who has rented his entire life, also known as “genary renting.” It was recommended to me by a Nashville, TN real estate agent who told me that the debt averse client will depend heavily on my ability to educate them on the finer points of mortgages etc. and then see if they want to proceed with a purchase. . In fact, I was able to dust off the old calculator!
You are considering purchasing a condominium in the Nashville, TN metropolitan area. Condo real estate prices here can range anywhere from $60k up to $2 million. Based on your $7k down payment and your overall home payment goal of $750/mo, we set a price range of $90k. Your fixed 30-day mortgage payment would include property taxes, condo “interior” insurance (covers fixtures, cabinets, flooring, etc.), monthly mortgage insurance required by the FHA loan, and a $150/month allowance for the condominium homeowners association (HOA) fee. All of these totaled to about $760/month, and we’ll call that your total “purchase” payment. Her rent payment is currently $614/month, which is relatively cheap for a 1-bedroom apartment in Nashville.
We will assume that your rent will increase at a reasonable rate of 5% per year and that your property taxes will increase by approximately 25% every 5 years. We will also assume that home values will increase by 3% per year, which is historically a conservative estimate, especially for Nashville, TN real estate. Finally, figure that you won’t be paying any additional principal on your mortgage, just your normal payment.
After year 1, this is what it would look like:
Accumulated rent: $7,368
Cumulative “purchase” payments: $9,130
So based on these numbers alone, it would appear that rent is holding up well in the short term. And actually, that’s a pretty decent theory, because if you were to sell in a year or two, you’d probably have to pay real estate commissions, closing costs, and of course, you might have to deal with changes in property value. the House. All of this can eat up or wipe out any profit you may have had. But you still have to consider the potential appreciation and principal reduction that the increase in EQUITY (home appreciation plus loan principal reduction) creates in the short term. At the end of year 1, you would potentially have equity of $3,844. Adding the principal back to your “purchase” payments in year 1, you would actually be ahead of the rental scenario by about $2082.
As the rent continues to increase by 5% annually, if at the same time you see the value of the home increase by 3% each year if he buys, you really start to see the difference increase. For example, after 5 years, this is what it would look like:
Total rent: $41,585 (actual monthly rent payment becomes more than “purchase” payment after 5th year)
Total Purchase Payments: $45,649
Factor in the capital increase you would have, and your cumulative net benefit from the purchase is $8,200.
After 10 years, the rising rent payments really take over, and the numbers look like this:
Rent: $96,138
Buy: $92,619
After calculating your capital increase, your net purchase benefit skyrockets to $49,616. After 15 years your net “purchase” profit would be approximately $104k! Wow.
Isn’t it scary to look back and consider the total amount of a country’s income over several years? And then have nothing to show for it but an address in the white pages? On top of that, what if we had considered the huge benefit of the $8,000 First Time Homebuyer Tax Credit (due after 06/30/10) or Mortgage Interest Tax Deduction? So it really swings the pendulum even more to the “buy” side.
People might say, “well, look at what’s happened in the last few years with home values.” While it is true that in the last 2 years we have seen some declines in real estate values in Nashville, TN, they are nowhere near what we have seen in CA, NV, AZ or FL and therefore in comparison , have been somewhat flat (we can thank the music business, professional sports franchises, and the healthcare industry for much of that). That’s why in the long run, you’ll see these numbers even out. If you’re looking to buy and think you’ll only live there a year or two, I’d say wait unless you’re paying cash. But how many of us can do that?
In conclusion, my hope is that the above scenario clearly shows that when you have a mortgage, you don’t have an ever increasing payment and you can participate in the increase in home value and have some equity to show for it in the end. With rent over time, your payments are just going to go up, up, landlords have to constantly increase payments to account for inflation and increases in maintenance costs. If you consider the big picture instead of just looking at the monthly payment, you’ll agree that in the medium (3 years) to long term, buying your share of Nashville TN real estate can pay big financial rewards and getting you a mortgage. it may be just what debt-scared people like my client should do.
