Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Path: utzoo!mnetor!seismo!cmcl2!yale!husc6!think!nike!ucbcad!ucbvax!decwrl!altos.dec.com!fulford From: fulford@altos.dec.com (Mike Fulford, MS: UCC, DTN: 544-1313) Newsgroups: net.taxes Subject: Is renting cheaper than buying? Message-ID: <5883@decwrl.DEC.COM> Date: Fri, 10-Oct-86 15:57:24 EDT Article-I.D.: decwrl.5883 Posted: Fri Oct 10 15:57:24 1986 Date-Received: Sat, 11-Oct-86 21:21:43 EDT Sender: daemon@decwrl.DEC.COM Organization: Digital Equipment Corporation Lines: 343 The following analysis was obtained the Consumer Reports magazine, May 81. Is it cheaper to rent an apartment or own a home? Everyone has a different answer here, of course. The truth is, like a car, stereo, or a yacht, a home is a utility investment. The standard of living of course is much higher than renting, but then so is the cost. Probably the widest economic myth in America is that "owning a home will be the best investment that you will ever make." Just ask your parents they will tell you that without a second thought (parents are by default economics experts as all during your life as a child they taught you what you could and could not afford!) Owning your home and living in it until paid for, or using it as income property, is a different case indeed. What this is about is the pure economics of buying, living in, and selling your home. Take for instance a single peron with a net worth of < 30K, making $30K/year. Would it be worth it to him to buy and live in a financed home? That all depends on many things. In a purly monitary sense, he could come out miles ahead by renting and investing the extra monies in better investments. The following is a summary of the diffence in costs between owning an average sized home, in an average suburban mid-USA setting, to an 2 bedroom apartment in the same area. Here's the story dollar by dollar. The bottom line answer may surprise you: ------------------------------------------------------------------------- General terms- these are national averages from 1970-1980 and are not to be used as a comparison with your own situation. ------------------------------------------------------------------------- Inflation- is calculated in every line entry unless otherwise averaged (the averaged rate of inflation for the years 1976-1986 was 7.15%.) This is not to say that the this example is a reflection of those exact years! Proper investing- a 7% yield after taxes is considered to be par. The apartment is a large two bedroom, 2 bath, 2 carport, in midtown USA The house is a 3 bedroom, 2 bath, two car garage, with average 1/10 acre of yard space. Bought in 1970 for $50,000, and sold in 1980 for $100,000 in midtown USA, and has 1000 cu/ft more space than the apartment Value of house- keeps pace with the average inflation rate of 7.15% (as do the property taxes) Profit- this is the nominal profit of $50,000 (before the real costs) Taxes on profit- not taxed as it is assumed to be reinvested ------------------------------------------------------------------------- Renters world ------------------------------------------------------------------------ Rent of $300/month for the first year with 7.15% increases every year. Insurance- fully covered average of $100/year Rent deposit- $300 Renters credit- average tax savings of $20/year Utilites- inflation averaged at $50/month ------------------------------------------------------------------------- Cost of living in the financed home ------------------------------------------------------------------------- Down payment- average of 20%= $10,200 ($51,000 - 10,200= 40,800 financed) Closing costs- 1975 average of $4700 (again, a stray example!) Interest- 13% fixed Points= 2 ($1,000 added to the $50,000 price, in this case the $1K was sutracted from the down payment. I had to stick with my reference material!) Legal fees- $75 Inspections- $50 Interest- 98% first year, 97%, 95%, 93%, 90%, 85%, 80%, 74%, 69%, 62% are close to the norm of a simple interest mortgage. Property taxes- at a national of average of 1.72% Interest write off- State and Fed combined average bracket of 30% (less the average deductable of $1750) Insurance- fully covered average of $200/year, national average. Payments- monthly mortgage payments for 30 years of $425/month Maintenance- outside, inside, appliances- inflation averaged at $100/mo. Garbage pickup- inflation averaged at $5/month, national avarage. Sewage- inflation averaged at $2/month, natioal average. Water- 20/month national average. Utilities- heat, cooling, electric, hot water, ect- inflation averaged at $175/ month, national average. Tax preparation- average of $200/year, national average. Time as money- every hour of someones time has an economic worth. A rate of $10/hour is used here. For example, a well off person may have a maid, plumber, gardener, ect, and would not spend thier time on homeowners drudgeries (they could be playing the financial markets with the extra time, ect), whereas thier average rate of pay may be $10/hour. Persons not so well off would of course do the work themselves (or pawn it off on the wife and kid... but we won't get into those economics!) ------------------------------------------------------------------------- National average of time spent on homeownering- Time dealing with appraisers- 1 hour/year Time shopping and buying for- House itself- 50 hours Lawyer- 5 hours Financing- 15 hours Tax preparation & and general home owner financial managment- 1 hour/mo Permits, inspections, ect- 5/year Maintenance- Yardwork- 4 hours/week Interior work- 2 hours/week Shopping for home related items- 1 hour/week Dealing with contractors, ect- 5 hours/year Total time/year= 457 hours= $4,570 of worth of work. ===================================+===================================== First year homeowners costs | First year renters costs -----------------------------------+------------------------------------- Down payment= 10,200 | Rent= 3,600 Payments= 5,100 | Deposit= 300 Closing costs= 4,700 | Utilities= 600 Time in money= 4,570 | Insurance= 100 Utilities= 2,100 | ----- Maintenance= 1,200 | Nominal total= 4,600 Property taxes= 920 | Insurance= 200 | Minus renters Tax preparation= 200 | tax credit= 20 Water= 240 | ----- Legal fees= 75 | Real total= 4,580 Trash= 60 | Inspections= 50 | Sewage= 24 | ------- Nominal total= 29,639 Tax savings= 4,952 (writing off closing costs, interest, property taxes ------ and tax preparation) Real total cost=24,687 Homeowners real cost minus renters real cost= amount avaliable to invest= 20,107 Properly invested= difference of 21,514 ===================================+========================================= Second year homeowners costs | Renters costs -----------------------------------+----------------------------------------- Payments= 5,100 | Rent= 3,857 Time in money= 3,705 | Insurance= 100 Utilities= 2,100 | Utilities= 600 Maintenance= 1,200 | ----- Property taxes= 1,007 | Nominal total= 4,557 Insurance= 200 | Tax preparation= 200 | Minus renters 4,557 Water= 240 | tax credit= 20 Trash= 60 | ----- Sewage= 24 | Real total= 4,537 ----- Nominal total= 13,836 Tax savings= 2,752 (writing off interest, property taxes, ------ and tax preparation) Real total cost= 11,083 Homeowners real cost minus renters real cost= amount avaliable to invest= 6,546 Invested return for first year= 23,019 Plus return for second year= 7,004 ====== Total return on investment= 30,023 -----------------------------------------+----------------------------------- Third year homeowner costs= | Renters costs= -----------------------------------------+----------------------------------- Payments= 5,100 | Rent= 4,132 Time in money= 3,705 | Utilities= 600 Utilities= 2,100 | Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,058 | Nominal total= 4,832 Water= 240 | Insurance= 200 | Minus renters Tax preparation= 200 | tax credit= 20 Trash= 60 | ----- Sewage= 24 | 4,812 ------ Nominal total= 13,887 Tax savings= 2,696 (writing off interest, property taxes, ------ and tax preparation) Real total= 11,191 Minus renters costs= amount avaliable for investment= 6,379 Amount from last two years= 32,124 Plus this years return= 6,825 ------ Total return on investment= 38,949 -------------------------------------+-------------------------------- Fourth year homeowner costs |Renters costs -------------------------------------+-------------------------------- Payments= 5,100 |Rent= 4,427 Time in money= 3,705 |Utilities= 600 Utilities= 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,133 |Total= 5,127 Water= 240 | Insurance= 200 |Minus renters Tax preparation= 200 |tax credit= 20 Trash= 60 | ----- Sewage= 24 |Real total= 5,207 ------ Nominal total= 13,962 Minus tax 2,466 (writing off interest, property taxes, savings= ------ and tax preparation) Real costs= 11,495 Minus renters costs= amount avaliable to invest= 6,388 Amount return from last years savings= 41,675 Plus amount from this years return= 6,835 ------ Total return on savings= 48,510 --------------------------------+--------------------------------- Fifth year homeowners costs |Renters costs --------------------------------+--------------------------------- Payments= 5,100 |Rent= 4,743 Time in money= 3,705 |Utilities= 600 Utilities= 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,214 |Total= 5,443 Water= 240 | Insurance= 200 |Minus renters Tax preparation= 200 |tax credit= 20 Trash= 60 | ----- Sewage= 24 |Real total= 5,423 ----- Nominal total= 14,043 Minus tax 2,276 (writing off interest, property taxes, savings= ------ and tax preparation) Real costs= 11,766 Minus renters costs= amount avaliable to invest= 6,343 Amount return from last years savings= 51,905 Plus amount from this years savings= 6,787 ------ Total return on savings 58,692 ----------------------------------+---------------------------------- Sixth year homeowners costs |Renters costs ----------------------------------+---------------------------------- Payments= 5,100 |Rent= 5,075 Time in money= 3,705 |Utilities= 600 Utilities 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,298 |Total= 5,775 Water= 240 | Insurance= 200 |Minus renters Tax preparation= 200 |tax credit= 20 Trash= 60 | ----- Sewage= 24 |Real total= 5,755 ----- Nominal total= 14,127 Minus tax 2,139 savings= ------ Real total= 11,987 Minus renters cost= amount avaliable to invest= 6,232 Amount return from last years savings= 55,538 Plus amount from this years savings= 6,668 ------ Total return on savings= 62,206 -------------------------------------+---------------------------- Seventh year homeowner costs/year |Renters costs -------------------------------------+---------------------------- Payments= 5,100 |Rent= 5,437 Time in money= 3,705 |Utilities= 600 Utilities= 1,200 |Insurance= 100 Maintenance= 2,100 | ----- Property taxes= 1,301 |Total= 6,137 Water= 240 | Insurance= 200 |Minus renters 20 Tax preparaton= 200 |tax credit= ----- Trash= 60 |Real total= 6,117 Sewage= 24 ------ Nominal total= 14,130 Minus tax 2,011 (writing off interest, property taxes, savings= ------ and tax preparation) Real costs= 12,119 Minus renters costs= amount avaliable to invest= 6,002 Amount return from last years savings= 66,560 Plus amount from this years return= 6,656 ------ Total return on savings= 73,216 ------------------------------------+--------------------------- Eighth years homeowners costs/year |Renters costs ------------------------------------+--------------------------- Payments= 5,100 |Rent= 5,825 Time in money= 3,705 |Utilities= 600 Utilities= 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,494 |Total= 6,525 Water= 240 | Insurance= 200 |Minus renters 20 Tax preparation= 200 |tax credits= ----- Trash= 60 |Real total= 6,505 Sewage= 24 ------ Nominal total= 14,323 Minus tax 1,854 (writing off interest, property taxes, savings= ------ and tax preparation) Real total= 12,469 Minus renters costs= amount avaliable to invest= 5,964 Amount return from last years savings= 78,341 Plus amount from this years return= 6,831 ------ Total return on savings= 85,172 -------------------------------------+----------------------------- Ninth year homeowners costs/year |Renters costs -------------------------------------+----------------------------- Payments= 5,100 |Rent= 6,241 Time in money= 3,705 |Utilities= 600 Utilities= 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,600 |Total= 6,941 Water= 240 | Insurance= 200 |Minus renters 20 Tax preparation= 200 |tax credit= ----- Trash= 60 |Real cost= 6,921 Sewage= 24 ------ Nominal total= 14,429 Minus tax 1,742 (writing off interest, property taxes, savings= ------ and tax preparation) Real total= 12,686 Minus renters costs= amount avaliable to invest= 5,765 Amount return from last years savings= 91,134 Plus amount from this years return= 6,168 ------ Total return on savings= 97,302 ---------------------------------------+--------------------------- Tenth years homeowners costs/year |Renters costs ---------------------------------------+--------------------------- Payments= 5,100 |Rent= 6,241 Time in money= 3,705 |Utilities 600 Utilities= 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,715 |Total= 6,941 Water= 240 | Insurance= 200 |Minus renters 20 Tax preparation= 200 |tax credit= ----- Trash= 60 |Real total= 6,921 Sewage= 24 ------ Nominal total= 14,544 Minus tax 1,637 (writing off interest, property taxes, savings= ------ and tax preparation) Real total= 12,907 Minus renters costs= amount avaliable to invest= 5,986 Amount return from last years savings= 104,113 Plus amount from this years return= 6,405 ------- Total return on savings= 110,518 ------------------------------------------------------------------- House sold for= 100,000 Price bought for= 50,000 ------- Profit= 50,000 Total amount saved by renting= 110,518 Minus profit from selling home= 50,000 (non-taxable as reinvested) ------- Amount the finaced home cost 60,518 over the cost of renting= (or the amount you would have in your portfolio if you would have rented instead of financed a house.)