Why you should not buy a house in a flat or declining market
Posted on May 3, 2007
Filed Under Real Estate
It’s the ago old question, should I buy or rent? Most financial advisors and planners will always tell you to buy your own home as soon as possible. You’ll start building up equity and have the pride of ownership.
But that is not always case. Mathematics will tell you differently.
In a today’s market, where homes in some areas are declining in value or at best remaining the same, renting may be a better option than buying. If you are planning to purchase a home in an area where renting is cheaper than owning, you should perform these calculations first.
Let’s say that an average home is $250,000 and that it rents for $1200/mo. It’s taxes are $3,600/yr and there are no HOA fees. You have $50,000 downpayment for this home. The properties in this area are not appreciating in 2007.
Should you buy this home? Let’s do the math.
If you decide to buy: $200,000 mortgage at 7% the payments are $1,630/mo ($1330 + $300 taxes)
If you decide to rent: $1,200/mo
Renting saves $430/mo.
But that’s not all. You had to put a downpayment of $50,000. You have lost opportunity costs of this $50,000. If you decide to rent, you can safely put your $50,000 into an ING Direct account at 5% interest. This would generate $208/mo.
Renting now saves you $638/mo.
One big factor the financial advisors don’t account for is maintenance. If you are renting and the AC unit breaks, guess who has to pay for it! The owner! Not you. If the roof leaks, the dishwasher goes bad, the fence falls… the landlord pays. These are unknown potential savings but they are there.
However there are bigger savings that may come down the road.
If you decide to purchase a house down the road the price of the home may have dropped, it may be only $240,000. Even if it’s still $250,000, you have still saved over $7,656 during the course of the year.
If you decide to purchase the house that you are currently renting, you may be able to negotiate a better price from the owner. This is because the owner will not have to pay the customary 6% realtor fees to sell the house. On a $250,000 house, the owner will save $15,000 in realtor fees. You may be able to buy the house for $235,000!
If you do decide to rent because of the reasons above, you should be aware and follow market conditions. When you see the market begin to turn around and homes begin to appreciate that’s when you should BUY.
Note: There are tax savings when you buy real estate. In the example above, a person in the 28% tax bracket would save approximately $400/mo on their PITI payments when it comes tax time.
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