Buy Real Estate, Here's the Math

Gina Loudon
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Posted: Jul 12, 2011 9:36 PM

Real estate professionals often get bashed when they suggest that “now” is a good time to buy property. While critics can have many subjective opinions based on their unique experiences, math always tells the truth.

What do the numbers say about buying property today versus renting?

Let’s take a look at a typical property for sale, located right at the center of the nation in Kansas City, Missouri. It’s a 3 bedroom, 2 bathroom home in the upscale suburb on NE Howard Street in Lees Summit. It is fully renovated with a new kitchen, new bathrooms, updated plumbing, electrical and HVAC.

This home would cost $1100 per month to rent. 

It would cost only $780 per month to own with a 30 year fixed rate mortgage at 5%, including taxes and insurance.

Why Is it Cheaper to Own Than to Rent?

The market has overcorrected in some areas. This house is now $80,000 when it sold for $120,000 at the peak in 2006.  The low price combined with historically low interest rates make the monthly mortgage payment more affordable than ever.

The down payment is not a stretch either. An FHA loan would require 3.5% down, which would be $2800 on this house. The renter’s deposit would be $1100.

From the extra $320 the home owner gets by not renting, he should put aside $100 for future repairs.

That leaves an extra $220 cash flow that could be used to pay off the mortgage in 15 years instead of 30.

Who’s Better off in 15 Years - the Owner or the Renter?

Most rents increase 4% each year, so the renter would likely be paying over $1800/mo for this house in 15 years.

The home owner, on the other hand, would have no house payment if he did indeed choose to pay off the mortgage in that 15 year span.

He would still be responsible for taxes and insurance, which would be around $500 per month. He also would own the property free & clear, increasing his networth by $80,000 or more if home values in the area increase. 

What About 30 Years From Now?

The renter would be paying approximately $3000/mo for rent for that same house in 30 years, due to an estimated 4% annual inflation! Don’t believe me? Look up rents from 30 years ago.

The homeowner would still only be paying for taxes and insurance, which may have increased to approximately $1000/mo. 

The home will most likely have doubled in value in that time frame and would be worth around $160,000.  Again, if you don’t believe me, look up home prices 30 years ago.

And since the homeowner has set aside $100/mo for repairs, he has had over $36,000 to keep the home updated.

What if You Move?

While this all makes sense on paper, the truth is that families rarely stay in the same house for 30 years. A job may take you to another location, or you may find a home more suited for your changing lifestyle. If you sell your home, you will be facing 8-10% in closing costs.

Instead, consider keeping the home. You will avoid paying the closing costs, and the chances of renting it out for more than your mortgage are good given the increase in rents. Tax advantages will increase your cash flow as well.

Keep up your plan to pay off the home in 15 years with the extra cash flow, and you’ll truly land among the wealthy. That home will be paying you every month for the rest of your life.

Regrets?

Unfortunately, the homeowners who lost their lifesavings today probably paid too much for their property.  They have surely learned their lesson to never buy a home that costs more than 2-3 times the average salary of the area.

Others who bought at the right price but then refinanced to cash out the equity may also regret their purchase. They have hopefully learned not to treat their home like a piggy bank.

But I think you’ll be hard-pressed to find a homeowner today who bought 20-30 years ago, paid off their mortgage, now owns the home outright, and regrets that decision. They are the ones looking for tax shelters and solid asset protection as others try to come after their wealth.

Kathy Fettke is the CEO and founder of www.RealWealthNetwork.com, an organization dedicated to educating its members on how to build long-term wealth through real estate.