Friday, May 2, 2008

Buy or Rent that home?

Not everyone wants to be a real estate investor. For that matter, not everyone wants to own a home of any kind. And that is okay. Some people just don't want to be "tied down" or have to deal with a leaking water heater or have to take the chance on replacing a roof.

But for those of you who are still wavering between buying and renting and are wondering how the current Saline Real Estate market plays into that decision and whether or not it is worth it and...

Let's just lay it all out there for you so you can make up your own mind.

Here is our scenario: A house in Saline that costs about $150,000 will rent for about $1200 in most of the Saline area. The house is a 3 bedroom, 1 and ½ bath brick ranch, in good condition, with (maybe) a 1 car garage. Let’s project that you will either rent there for 8 years or own there for 8 years. That’s about the average length of time a home owner stays put. Renters will move more often, but will usually move into another rental house before finally buying a home. So those are the rules.


We'll start with the renter because the numbers are more simple. Starting rent will be $1200/mo. We'll raise the rents approximately 5% every other year. Years 3-4 will be $1250/mo. Years 5-6 will be $1310/mo and years 6-8 will be $1375/mo. Sound reasonable?

At the end of the 8 years you will have paid to your landlord $123,240. And the good news is you didn't have to shell out any other expenses for repair type items.


Taking the $150,000 house, we are going to say that you are going to get a 100% loan. Don't think your’e alone! If you have little or no money to put down, you can still purchase a home in Saline. In fact, now is the perfect time to purchase a home. Historically low purchase prices, coupled with low 30 year fixed rates, are just two reasons to purchase Saline Real Estate now.

FHA IS THE WAY. There are many benefits that an FHA mortgage can provide to buyers. The most significant benefit is enabling the seller to cover a 3.0% down payment and pay all closing costs. There are no income restrictions. Whether you are a first time buyer, or a seasoned buyer, this is the most flexible program available in the mortgage industry today.

Based on a purchase price of $150,000 with the seller paying costs and down payment with a loan amount of $147,268, Principal and Interest (P&I) is $882.95 based on a 30 year fixed rate of 6.0% + PMI (Private Mortgage Insurance, required on FHA loans) of $60.63 + $275.00 estimated taxes and insurance. Your total monthly payment will be $1,218.58.


Over that same 8 year period you will pay PITI (Principal, Interest, Taxes and Insurance) of $116,984.

That is $6256 less than if you rented.

Now we have additional factors we have to take into account. Over that 8 year period you will have paid in interest alone $66,755. Home mortgage interest is deductible on Schedule A of your Income Tax return. If you are at the 28% tax bracket, you will have seen a tax savings of $18691 over those 8 years.

Now the difference is even more in OWN's favor, by $24,947 over the 8 years.

Another thing to think about is the reduction in the principal balance of your mortgage. Over those 8 years, each month you paid your mortgage, some of that money (at first a very small amount) went towards reducing the amount of money you owe. Over the 8 years, that amounts to $18,008.

The difference is now in OWN's favor by $42,955 over the 8 years. Do I have your attention now?

Still one more factor to take into account: Appreciation. It seems that we always talk about appreciation of home values. Lately, though, the talk is about lack of appreciation. Here in Saline, we have seen a loss in value of about 25% in the past three years.

Historically, the Saline housing market has appreciated at 5% a year. But for our purposes, we are going to use a yearly average appreciation of 3%. 8 years at 3% per year appreciation (on average) will make that $150,000 home sell for about $190,000. That is a $40,000 gain.

Now OWN's favor is by $82,955.

It is fair to say that after 8 years there will be deferred maintenance that will have to be caught up. So subtract from OWN $5000 for carpeting, $2,000 for appliances, $5,000 for painting and $5,000 for miscellaneous.

You are still left with an advantage to OWN by about $65,955.

There are, obviously, multiple variable and unknowns. The market could continue to go south like some gloom-and-doomers would have you believe. It wouldn't surprise me at all if we stay flat in 2008 and 2009.

There are those who would have us believe the stock market run-up of the '90's, and the real estate boom of the 2000's wouldn't end. They did. Now we are led to believe that the Saline Real Estate market will never rebound. It will. People will still need a home to live in. Banks will still exist, with a business model to make money by loaning money (for home purchases). You can count on that.

Another factor is lifestyle. Perhaps you just don't want to own. I understand that. I've sold duplexes where the tenants have been there more than 10 years. They liked where they lived, and didn't see any reason to do anything different.

The bottom line? Talk with an experienced Realtor®. They can guide you through the numbers of your specific situation, so you can make an informed decision.

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