This is the age old story. shall I rent or buy. I recently had my first true eye exam as an adult, and at the age of 41 I was told I needed reading glasses. I guess its a right of passage and something many of us go through at some point in our lives. But during the axam I had a long talk with my new doctor about real estate and his personal situation. He is looking to move his primary residence from the suburbs to the city, and he wonder what tulip would be the best fiscal move, renting or buying. I took a long time, much longer then the exam, to breakdown the numbers for him and thought it might help everyone if i shared them.
This is what we went over
He wants a small to mid sized two bedroom in Chelsea in a newer building. on average this will cost him either $8,500 in rent of $2,000,000 to buy plus about $2,800 in taxes and common charges. With the doctors current age he felt he would need the home for about 15 years before he fully retired and move to somewhere like Florida. He was leaning toward renting because of the basic upfront numbers.
Renting = would be only the $8,500 a month, with some small one time fees.
Buying = $400,000 in downpayment, about $80,000 in closing costs. then the mortgage would be about $8,000 and the monthlies again would be another $2,800 a month.
So one year of renting is $102,000 while buying would be $609,600.
But now lets look at all the numbers for the full 15 years.
Lets start with renting. Rents have been increasing at about 3.85% per year (over the past 20 yards). Lets consider it will stay at that place of=ver the next 15 years. With this increases the Doctors overall payments will be $2,019,789 with the last years rent being $14,424.80 monthly. Thats it very simple.
Now lets look at the cost of owning. We have the $480,000 to closing. Then we have the $10,800 in mortgage and common charges. Now the mortgage costs will stay constant (we are saying hat the doctor took a 30 year amortized loan). But the taxes and CC will go up each year, these numbers go up about the same as market rents do by %, so lets use that same formula. This will leave the Doc paying $2,105,342.58 with the final years payment being $12,751.70.
If we add the yearly costs with he monthly costs buying in this scenario comes to $2,585,342.58 compared to the $2,019,789 for renting at a total of $565,553.58 out of pocket over buying. But wait there is more. When you own you have taxes savings or rebates. If the doctor is in the 40% tax bracket he would receive year take rebates totaling $345,600. these rebates would come back to the Doc with his other tax returns and would look to be about $28,000 his first year and about $19,000 his last year. These rebates will lessen due to the Amortization schedule. The longer you pay down your mortgage the higher the % goes toward priceable rather then interest. the interest is what is tax deductible and it is becomes a lower payment each year the rebates shrink slightly. Also for this scenario i am aquatint the taxes to be half of the $2,800 monthly payment and the common charges be the other equal half.
This now brings the benefit of renting down to $219,953.58. But wait there is more. When you are down renting you move out and when you move as an owner you sell. So lets loo at that.
When you bought the home costs $2,000,000. I am not about to try and guess how mush the market will rise in the next 15 years, I have no idea. So lets just bet it follows the same rental math at 3.85% even if that is being conservative. This would make your two million dollar home worth $3,394,071.66. But you still do have debt on that home. You started with $1,600,000 of debt. But over 15 years you would only owe $1,028,488.43. Also selling at that new price will costs you about $280,000 in closing costs. This would bring you to about $2,085,583.23 from the sale.
Now I am leaving some other basic facts out for convenience, but ill mention them here. You will have insurance, homeowners and renters. Renters is much cheaper and homeowners will costs you about $50K more over the 15 years unless you can bundle that costs with other insurance. Also owners have more costs for upkeep, you have to repair your own appliances and fix some issues, but those are small costs. Buying is more time consuming (in most cases) and stressful. I am also not touching the capitol gain taxes on the sale, there are lots of things to discuss about that, legal accepting for paying them or transferring them depending on what you want with the sales profits and your own personal tax situation.
So in the end owning will cost the good Doctor $1,865,629.65 less. But lets look at it this way renting will costs the doctor $2,019,789 for the 15 years. Finally buying will costs the Doc $154,159.35 out of pocket. Or you can look at it monthly, the average monthly cost to rent would be $11,221.05 while owning would cost $856.44 a month.
Now this is a very basic outline of this one rent vs. Buy situation. If you are actually looking into this there are many other items to take into the comparison. We could aim at coops that costs much less then condos and have fewer closing costs, that would have saved the doctor about 130K upfront, about about $250k over the life of the loan. Also you done have to sell when you move to florida the property could become a rental income. in this scenario that 16th year of ownership would have brought in about $26,000 in profits, then you could wait to pay off the full mortgage to reap a larger profit or pass the asset along to family through a trust or inheritance.
Regardless of your personal situation what this outline shows us is that it is more fiscally beneficial to buy then renting the long term, no if, and or now about it. If your friend or advisor tells you differently they are just flat out wrong.