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Rent or buy a home?

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(from Asheville Metro Economy E-newsletter - January 2005)


Here is a simple calculation to illustrate that buying a home is generally a lot better than renting one, the reason that almost every American buys a home as soon as he or she can afford to buy one. Suppose you rent a house at $1000/month and you pay $12,000/yr rent. As the housing price appreciates an average of ~7% per year (a typical long-term average) and your landlord increases your rent 5% per year, your total rent payment will be $12,600, $13,230, $13,891, $14,586 for the second, third, fourth, and fifth year, respectively, and your total rent payment for five years will be $66,308. If you buy the same house at a price of $160,000 (house price may be roughly estimated as 160 times monthly rent) with a 100% mortgage loan at 6% 30-year fixed interest rate, your mortgage interest, tax, insurance, and home maintenance costs will be about $12,000 per year. Since your interest rate is fixed, your total yearly payment increases only slightly and your total payment for five years will be about $70,000. Your mortgage interest and tax payments are tax-deductible and will save you ~$10,000 taxes in five years depending on your tax brackets. Your house value will increase $60,000 in just 5 years assuming an average yearly appreciation rate of 7%. This will save/earn ~$70,000 in 5 years by buying rather than renting a home. That is an average savings/earnings of ~$1160 every month. Detailed calculations of various situations can be done at: http://realestate.yahoo.com/re/calculators/rent.html

Furthermore, owning a home will bring great pride and satisfaction of homeownership and freedom, allowing you to add, modify, or build onto the property as you wish. You will quickly build up home equity and wealth. It will greatly enhance your credit scores, which will lower your automobile and health insurance premiums, lower the costs of any loans you borrow (see www.myfico.com), and bring new opportunities for buying more properties and other businesses in the future.

See an article on how real estate savvy people do not need to pay any tax using all the tax breaks for real estate investment.

Why wait? If you can afford to pay a monthly rent of $700 to $1000, you can generally afford to buy a $140,000 to $200,000 home, even with very little down payment.

Rent to own: If you really cannot qualify now for a loan, you may want to rent a property with the option to buy it in one or a few years. Here is an example of how it works: for a house that normally rents for $700/month, its current fair market price is roughly 160 times the rent, that is, $110,000, and the landlord is likely to agree to lease it to you with the option to buy it within 2 years at a fixed price of $120,000. You put down a rent security deposit as you normally would for any rental (~one month rent), plus a non-refundable purchase option fee (~another month rent). Your rent will be $800/month, of which $100/month will be credited to your down payment for purchase of the property. The great advantage to you is that you have fixed the purchase price at $120,000 (5% price increase per year over the current fair market price) even if the market price actually goes up 7% (long term average) or 15% or more per year. You can be sure you will realize the American dream, but you do not have to buy the property if its market price actually decreases in two years (highly unlikely) or for any other reasons. The landlord also benefits as he or she can receive a higher monthly rent, have a tenant who is likely to take better care of the property, and can sell the property directly to the tenant with ease. If you are interested in this kind of win-win deal, please let us find you one at no cost to you.

Buying a house as a rental investment
(30-40% annual return)

Rental House Investment Return Worksheet:  
Purchase price 200000
Down payment(20%) 40000
6%-30yr Mortgage payment/yr 11508
Property tax (1.1%) 2200
Home Insurance 340
Repair/mantainance reserve 1000
Professional property management (10% rent income) 1425
Total expense/yr 16473
 
Rental income/yr (~7.5% of house price, 6% vacancy) 14250
Property depreciation tax saving 2000
Property-tax tax-deductable saving 660
Repair+ other expenses tax saving 600
Total mortgage principal paydown (1st yr) 1908
House appreciation (6% per year) amount 12000
Total income (rent+tax savings+appreciation) 31418
 
Net income/yr (income - expense) 14945
Investment return (% per year) 37

Use this Excel file to calculate investment return based on different assumptions (e.g., different price, interest, rent, etc.)

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(from Asheville Chamber of Commerce)


Rental investment return is far better than the 3-5% annual return by investing in bank CD's or even the 8% theoretical average long-term annual return in a diverse stock portfolio. Rental investment return is even better since you only pay some tax for the house price increase when you sell the property, whereas other investment incomes or your regular job income are taxable in the same year (after federal and state income taxes, Medicare, social security and other taxes, you only keep about half what you earn).

Please Enter Loan Information

Years:

Interest:

Loan Amount:

Estimated Monthly Payments

Principal + Interest: Monthly Tax:
Monthly Insurance: Total Payment:
Tax rate above is assumed to be 1% of assessed value. Currently properties within the city of Asheville are taxed at less than 1% of the assessed values, whereas properties in the county are taxed at less than 0.5% of the assessed values. Assessed values are generally 20-60% less than the sale's prices

If you think it will be too difficult for you to manage a rental property, you have the option to let us manage it for you. We are licensed professionals with extensive knowledge and experience in managing rental properties for the best long-term return for the owners. We take care of all the day-to-day management of the rental property. Our commission is only 10% of the rent received.

Rental management is actually not nearly as difficult as many people think. Bad tenants are rare. Even when you really encounter one in the end, just consider it a minor cost of doing business. Landlords should know that tenants put down a security deposit equivalent to one month rent, the rental contract requires them to pay rent in advance (first of the month), and the small claim’s court (filling fee $80) can quickly (~2-3 weeks) evict non-paying or contract-breaching tenants, and thus it is relatively secure for the landlord. Landlords can also make it clear to the tenants that they can have the court place a monetary deficiency judgment on the tenants, and can report to the national credit bureaus. The eviction record and the debt record (both are public) will significantly affect the tenants’ credit history and may directly lead to: rejection by future landlords or even utility companies (most of them check credit history), rejection of employment (many employers do check potential employees’ credibility/financial responsibility), and rejection by lenders or substantially higher interest rates charged, thus costing them thousands of more dollars per year for a typical mortgage loan. Poor credit history and money judgment will also significantly affect their auto loans, auto insurance, health insurance etc because it is well known that those with eviction, court judgment and poor credit history are not nearly as responsibe, are significantly more likely to have accidents, health problems, and are more likely to file false claims. Knowing these negative consequences for the next 10 years, any sane tenants will not be so foolish as to damage the property or not moving out until forced out by the sheriff.


Buncombe Realty, 1104 Hendersonville Rd., Asheville, NC 28803 (view location map)
Phone (828)301-2021   Toll-free 888-932-8001   Fax (828)277-1240

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