The Numbers Add Up: Buying Versus Renting
Looking for housing is a fate everyone eventually faces. Usually this starts with looking for a place to rent -- an apartment or a house -- and sharing it with roommates. But is renting really the best option? Renting can be easier and requires less risk, but for those willing to look into buying their own house, the rewards can be significant.
Let's say you are moving in with two friends and want to live in a 3-bedroom house. Let's say you are lucky enough to live in an area where houses run around $100,000 to purchase or $1,000 per month to rent. Putting 10 percent ($10,000) down on the cost of a house and taking out a 30-year mortgage of $90,000 at 6.25 percent interest leaves your costs per month somewhere around $765.
Taxes and Insurance:
So instead of $1,000 a month, you can have your own home and begin building equity for about $235 less per month.
Since you are the one taking the risk of buying the house, you may want to calculate your roommate's rent on the original $1,000 per month rate. You bring in $666 ($333 x 2) per month, plus they are paying two-thirds of the utilities. Take the $666 from the $765, and that leaves your expenses at $99 per month, plus your portion of utilities.
But that's not all. Assuming your home increases in market value (appreciates) at an average of 3 percent per year (this is low for some areas) and you live there for three years, it will be worth $109,250 when it comes time to sell. During those three years, your mortgage (loan) will also be paid down to $86,500, creating an extra $3,500 in equity.
Equity [Down Payment + Mortgage Payoff]:
Appreciation [Increased value]:
Now take a step back and see what you have done. In three years, you turned $10,000 into $22,750. In investment terms, this is an annualized rate of return of 31.5 percent per year. It would be much higher if you figured out how much you saved in living expenses. So consider paying yourself, not the landlord.
In three years you turned the $10,000 down payment into $22,750.