I have seen some online calculators that attempt to compare buying vs. renting. They rely on various pieces of info you input – like the amount of rent, vs the mortgagre amounts, rates, tax rate, etc…
Obviously, if the market were to take a big enough dump..then no matter what price you bought at, you would conceivably take a loss….
I’m currently renting – and waiting for prices to keep dropping. I hope they go down the drain..but I’m also trying to run some of my own calculations, just to satisfy myself that I’ve crunched the numbers right, and that even if I got a hosue at a “super steal price” that I’m not making a bad decisionb y waiting.
Here is my situation: feel free to throw whatever advice you can offer.
I am the sole wage earner in the family. married, two kids.
I earn about $130k/year. (Ultra stable gov’t job. rises/falls in the economy won’t affect my earnings or job security.)
I don’t plan on moving or relocating to another city for work.
I have no issues with renting. As long as the house is clean, nice, and in a good area. I don’t see renting as bad..you either rent the house, or rent the money to buy the house..it’s renting either way you look at it. Just renting different stuff.
I am renting a house right now.
I rent if for $1400/month.
the owner wants to sell it to me for $440k.
I used round numbers and figured a sales price of $400k.
Assuming 100% financing, and figuring 6% and 9% for the rates on the 1st and 2nd..i came up with a mortgage of about $2600. Prop taxes here at 2%. So another $700/month. HOA is $150. Insurance another $100/month or so.
so total carrying costs are $3550. Add a gardner and you get an easy $3600-3700/month in STUFF I have to pay for to own this home.
I am NOT a tax expert…but I was figuring roughly 40% of that as the “savings” via my tax deduction. Given my income…and the amounts I’m figuring, maybe I”m way off…
please educateme on how i am doing the taxes right ..or WRONG.
but assuming I saved about $1300/month in taxes..that still puts me at $2300/month in actual cost.
I rent for $1400. easy subtraction shows I comeout ahead by renting. to a tune of almost $1000/month.
someone double check my calculations and tell me I did this right…or wrong.
the only part of this equation..that will get adjusted is the fact that my rent is dirt cheap right now. the owner probably underpriced ths house somewhat to rent it FAST. at $1400 it’s as cheap as some condos..and this is a nicely upgraded house in a very nice area. but for the square footage being low..it would be much higher…there are very house hosues this size… 1900 sq ft…so most houses up here in Temecula..rent for $1800-2000 b/c they are 2800-3500 sq ft. I honestly don’t need that much space and am content with 2000 or so. but since there are so few that size…you have less to pick from..and i’m picky about location, cleanliness, etc.
so if the owner is really going to sell..and won’t sell for the price that it’s really wroth..b/c somehow i doubt the owner will go down to $300k or whatever it would take tos ell it to me…then i’ll be forced to move..and effectivel will have to pay MORE in rent. like $400-600/month more..whihc i’m not thrilled about..
althoug in comparing rent vs buy..it’s hard to compare buying THIS house vs. renting another..b/c then it’s apples to oranges…
if i could buy THIS house for $300k…or some realistic price that would be great…but like a lot of owners who tried to flip and are now renting..they all bought thinking prices would go up, now they are upside down and they can’t stomach to sell for less than they paid and so they’ll hang on until the end…the person who owns this house bought to flip…and now is probably faced with selling at a loss..or walking away.
if in 6 months when my lease is up..if the house is worth far less than they paid they *might* be STUCK renting..and then will want me to stay and I can just enoy the cheap rent and nice house and let them take it up the you know what… 🙂 that would be my ideal situation..rent this house as long as I can..and only buy when prices hit rock bottom and the best deals can be had…
anyway..is my math right? any other suggestions as to how to look at the calculations?
one thing I wasnt’ sure if I should consider..b/c the market is fallng…but if you buy and are on a fixed mortgage..making equity payments..thene ach month..on a house in the $400k range.assuming 6% rates..you end up making something like 400 bucks or so a month in equity..so assumingprices stayed flat..at th end of the year, the notei s paid down somehat..and you have made some equity…
how do you factor THAT into today’s market? like suppose the owner of this house gave me a better deal..say they would go down to $375 or something under “current’ market conditions… then at that price..is there a way to factor in the tax break, the equity you’d earn..and the “cushion” you built in by the low price…to really not “lose”…
my big fear is prices here could fall a lot more than people think. like this house sold for $440k. six monthsl ater the owner had it listed for $550k. a montha go they offered to sell it to me for $440k…. six months and they want $100k less.
in six more months it may only be worth $350k or even $300k….
if houses like thi were selling for $200k in 1999 before the big “rush” in prices…and if you assume prices only went up at a “normaL” rate of like 3-5% /year…then this house should really be selling for high 200s…or low 300s…
I read somewhere that take the monthly rent and multiply it by 200 to get the approx selling price. you do that and you get 280k if rent is 1400. even assuming rent is “low” on this house and that in a good market it would rent for 1800 (which it won’t b/c it’s small) and you only get $380k.
ideally this house would rent for 1600-1700. 1600 * 200 = 320k.
For tax purposes, your standard deduction, married filing jointly is $10,300. You get to deduct this amount regardless of rent or buy. Any mortage interest plus property taxes over the 10,300 amount times your tax rate equals your tax savings.
If you have Excel this is a simple spreadsheet that may be helpful. (The state tax break calculations may be wrong) You basicaly fill the blue cells and it is good only for the first year of owning.
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