Homes: Rent vs. Own

2010-03-07 08:20 - Opinion

I like, whenever possible, to reveal both good analysis and real data, where it is often otherwise lacking. Sadly, social pressure is strong enough that I'm not going to share with you (the few of you that actually read my little blog) the actual numbers of my annual income. So I'll make up an income of $60,000 and equally easy-to-calculate overall tax rate of exactly one third.

Now to why! I've done some calculations on rent vs. own before. But I've recently gotten a bit more serious on the owning idea. Because I think I finally know enough to have it make sense. I really pay $850 per month for rent right now. One of the really nice things about renting is that it's really that simple. I pay a fixed amount every month, for the duration of the lease, and that's it. But the amount goes up with each lease. Taking rent stabilized apartments as an example, rent going up by 6% every two years is a baseline.

Owning, assuming an underlying mortgage, is more complicated. First there's the mortgage payments, part of which is interest, and then there's property taxes. The amount of mortgage payment that is interest changes, as the principal is paid off there is less to charge interest on but the payment remains constant. So to figure the effect of the interest we have to consider the whole life of the loan. Property tax also changes over time. I found a document called The Property Tax in New York State (PDF) which seems to say (see Appendix A) that property tax went up by 62% over the course of 12 years. That's just about 4.1% compounded annually for 12 years. I'll assume a mortgage for 80% of the value (a common maximum in New York). But how much does the place cost?

I searched online to find ten apartments for sale that seem similar to the one I'm renting now. I ended up with a median price of $179,000 and monthly maintenance of $385; about half of the maintenance is (deductible) property tax. Finally, mortgage rates of 4.4% are available now.

So there's the numbers I'm working with! Now for the analysis.

Renting costs $850/mo, increasing by 6% every two years. Over the course of fifteen years, that's a total of $186,571 (for two years each, per month: $850, $901, $955, $1,012, $1,073, $1,137, $1,206, and for the last year: $1,278). None of this is deductible.

Owning means a down payment of $35,800 (plus various closing costs, ignored for convenience). The mortgage calculator at bankrate.com tells me that, with $143,200 left of the purchase price to borrow, there will be $52,669 extra paid in interest over a 15 year loan (deductible). There would be $97,090 in maintenance over 15 years (monthly each year: $385, $408, $433, $459, $486, $515, $546, $579, $614, $650, $689, $731, $775, $821), half of which ($48,544) would be deductible.

So the totals involved, over 15 years:

  Renting Owning
Gross Income $900,000 $900,000
Direct costs $186,571 $227,544
Deductible costs $0 $101,214
Tax Costs $300,000 $266,262
Net Income $413,429 $304,980

So, there's one more analysis clearly in favor of renting. It costs over $100k more to own. At least in this neighborhood. And I've ignored a set of costs involved in buying (closing, lawyers, etc.). I'll have to repeat this for the costs in Manhattan.

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