To Buy or Not to Buy
According to the National Association of Realtors, First Time Homebuyers make up approximately 33% of the purchases nationwide.
Millennials, one of the strongest upcoming home buying demographics, are no exception. The trend has moved to smaller lot lines, easy maintenance, access to restaurants and community activity, environmentally friendly, walkable and close to public transportation. With that said, demand is strong. But what is the benefit to purchasing versus renting?
The benefits of ownership are different and personal for each individual, we’ve put together a list of 10 that we thought are important.
10 Benefits of Home Ownership:
- Tax Benefits – The ability to take tax deductions on home-related write-offs is a tremendous equalizer.
Mortgage interest and county taxes are both eligible to write off your Federal 1040’s each year. It also means that you move from filing a 1040EZ to the 1040 Long Form. This allows you to write-off other deductions such as charitable deductions.
As an example of what the tax write-off can do for you. Let’s say you’re at a 25% tax bracket.
If your interest per month is $2,000 and your county taxes are $400, $2,400 is eligible for a tax deduction. Multiply $2,400 * 0.25 and your deductions means that you aren’t taxed on about $600 of your income. You can either bring that additional money home each month by changing your W4 or wait until the end of the year and get a refund.
That is a lot of buying power!
- Real Estate – A Hedge Against Inflation:
Unlike rent, if you are in a fixed rate mortgage, your payment will not go up.
How Does Inflation Work: Inflation is the increase in prices for goods and services over time. In a healthy economy, the inflation rate is usually kept at about 2-3% per year. Simply put, if a gallon of milk costs $3 this year, next year that same gallon of milk will cost $3.075 and in 12 years it will cost $4.
While this increase in prices might not seem like a big deal, when it’s applied to bigger ticket items like cars and real estate it can be monumental.
Increases in Monthly Rent: In 1970, the average rent rate in California was $484 per month. By 2000, it had risen to $747 per month. Fast-forward to 2015, and San Francisco’s average is $2,000 per month, Sacramento is $950 and Fresno is $810 per month. That includes a large number of apartment rentals, which keeps rent averages down. Rent for a home in Folsom, Roseville, or El Dorado Hills, CA will cost you more like $1,500 to $2,500 per month.
House Payments Are Stable: If you had purchased a home in 1990 for $193,770 at a rate of 8% and never refinanced, your payment would still be $1,317.59 per month and it would almost be paid off. With the benefit of refinancing, you may have been able to reduce that rate down below 4% in the 2000’s and even reduce the monthly payment or paid it off significantly faster.
- Real Estate Values Have Increased Each Decade:
Can Prices Go Down? Yes, one of the arguments against Real Estate is that prices can go down. It is true that some states are much more robust than other states in the US. They pick up steam over time and can get over-heated. What follows is a cooling off period where prices can go down for a period. Roughly every decade or so California Real Estate seems to take an adjustment. Other states like Texas have much slower but stable growth.
Over Time Prices Have Gone Up: When in a down period, it can feel like prices will never come back again. That is, until it does. Even after the Real Estate crash of 2007, values have come back. Zillow states that the average California house price in 2015 is $448,000. Below is what happened over the past 45 years:
- Ownership Saves Money Over Time:
What Rent Will Cost You: No matter how long you pay rent, you won’t have any equity when you’re done. Over 10 years, paying $2,000 per month will cost you about $240,000 and $720,000 over 30 years. That is money that will go straight to paying your landlord’s mortgage. It doesn’t even include inflation, the annual increases in rent. Most agree that prices aren’t going down any time soon.
With a standard annual increase of 3% in rent, your 10 year cost will actually be $275,133 and 30 year will be $1,141,809. In the end, you’ll have no equity and still need to continue renting in order to live.
What Home Ownership Can Save You: On the other hand, as an owner, you are paying your own mortgage rather than your landlord’s. Every month you pay a portion of the payment toward equity, your ownership stake in the property. At the end of the 30 years, you’ll own your home.
An Example of Equity: If you purchased a home today in East Sacramento for $500,000 at a rate of 4.5%, you’re payment should be approximately $3,158.43 per month including principal, interest taxes, and insurance. At a 25% tax bracket, your actual monthly cost should be about $2,560 after your interest and tax write-off. If the house increases at 5% per year, a reasonable growth rate, you’d have over $2.1 million in equity after 30 years.
- Monthly Mortgage – $3,158.43 (including Taxes & Insurance)
- After-Tax Payment: $2,560 (At a 25% Tax Bracket)
- Amount Paid Over 30 Years: $921,600 ($2,560 per month * 30 years)
- Value of Home After 30 Years: $2,160,971 (Annual 5% increase)
- Strong Investment Strategy – Leveraged Returns:
Real Estate allows for fixed low interest rate leverage. This is the opportunity to use debt to maximize the returns on an asset, your home. You can put down as little as 3.5% using an FHA Loan and get returns on the entire value of the property.
Leverage – How It Works: If you buy a $450,000 property and put down 3.5% as your down payment, you’ll need to come in with $15,750. If the property only goes up 3% per year you’ll make $13,500 per year in equity. Your return on down payment will be 85.71% per year. With an FHA Loan, you will be pay a little more per month than a conventional loan due to mortgage insurance, but it allows for very little down payment. As long as the payments fit, the returns can be powerful over time.
- Pride of Ownership:
Most people dream of having a home of their own. There is a certain pride of accomplishment that comes with being in control of your own destiny. It’s hard to put a price tag on what that freedom means.
Over the years, home ownership has been a Right of Passage for many Americans. Moving from parents home to renting then ultimately having a home and family of their own, it has been at the very fabric of our society. For a while, it felt like this dream might be escaping this generation, but with improved affordability, the dream is alive and strong.
The opportunity to build your life your way is exciting and fundamental to who we are.
- No-One Can Kick You Out:
One of the challenges accompanying the housing crash of 2007 was the instability that came with not knowing whether your landlord was going to lose their home or not. Special rules were enacted to protect renters so that they couldn’t just be kicked out without notice. However, as a renter the unknown of whether you would be there next year or not was scary.
As an owner, as long as you make your mortgage payment, you’re in control. No one can serve a notice and let you know that you have a certain period of time to vacate the property.
- You Don’t Have to Ask You Landlord:
You Can Choose Your Furry Family: Pets have become very important parts of our lives. They are companions and in many cases family. It is a strong advantage not having to ask your landlord whether they will permit pets or not. As an owner, you make the decision. You’re in charge.
Home Improvement: Decisions regarding Home Improvements are your choice as well. If you decide that you’d like to paint your home pink with purple trim or put in a pool, it’s your choice. Who wants to put money into a home that someone else owns? As a homeowner, you benefit from any improvements you put into your home.
- Build Stability in a Neighborhood:
There is something powerful about becoming part of a neighborhood and community that draws us in. Driving our stake into the ground and saying this is my home provides a stability and comfort that renting may not. This permanence creates a familiarity that can be a big plus for many homeowners.
Getting to know neighbors at Holiday Parties, having them watch out for your family, and kids for yours to play with are all benefits of a neighborhood. Access to premium schools and programs are not always available to rental communities.
Over the years, having pride in a neighborhood can help to generate family traditions and memories. While these cannot be quantified, they are very real and help to create the culture that many families appreciate.
- Homeowners Have Flexibility through Cash-Out Refinances:
What You Can Do With Equity: Over time, several things can be done with the equity that you’ve built, which can maximize your gains. A Cash-Out Refinance is a unique benefit that homeowners have to access their equity.
The money that you’ve developed in your home is real and does not have to stay locked up until you sell. Taking funds out to purchase investment properties, pay off other high-interest debt, add on or make improvements, or buy the 2nd home you’ve always dreamed about are all possibilities.
When To Do A Cash-Out Refi: It is ideal to do your cash-out refinance when rates are low so that you can get the maximum benefit. A Cash-Out Refi can provide tremendous flexibility and if managed properly can help to diversify your portfolio.
If you’d like to discuss owning versus renting, we are here to help. Give us a call or email.