Let’s jump right into this numbers. Here is a realistic buy vs rent analysis for January 2012 in Ventura, CA.
- 1529 Winford Ave, Ventura 93004
- Purchase Price: $328,000
- 4 bedroom
- 2 bathroom
- 1345 square feet
- 6438 square foot lot
- Good location within tract
Monthly Rent Amount: $2,100
Monthly Payments to Own:
Here is a payment example for an home buyer (intending to occupy) with an FHA loan fixed at 4% interest for 30 years and a 3.5% down payment.
Purchase Price: $300,000
Down Payment: $10,500
Mortgage Insurance: $287.50
Total payment before tax benefits = $2,135.00. (Don’t compare yet! See the tax benefits.)
Let’s say the average tax paid of a buyer (federal + state brackets averaged out), works out to 20% of their income being paid towards taxes. Home owners are able to deduct interest, property taxes, and mortgage insurance payments from their income. Exemplified:
[ 965.00 (interest) + 365.00 (taxes) + 287.50 (mortgage insurance) ] * 20% (average tax bracket) = $323.50 in monthly tax savings.
Therefore, the buyer’s effective monthly payment after tax benefits is = $2,135.00 – 323.50 = $1,811.50.
Rent: $2,100.00 vs Buy: $1,811.50
Now, consider principal pay down. Principal pay down is money that you are paying into principal every month, which is money that you may be able to recuperate (if you sell for slightly more than what you bought it for, which is often possible as a long term owner).
$1,811.50 less $417.00 principal paid . Think of this like a forced savings account of money that is yours and can make a return (fluctuates in value with the market).
Rent: $2,100.00 vs Buy: $1,394.50 == $705.5 less per month to own a home.
Common Objections Still:
- Planning to move again: Rent the property out for $2,100 after you’ve done living in it. The rent should cover your mortgage payments and more. Hire a property manager so you don’t have to deal with it.
- No landlord fix-up: Landlords aren’t in charge of maintaining the property. They only jump in when there is a necessary repair that the owner needs to do for the tenant. However, the more repairs the landlord needs to do, the higher and quicker the rent will increase for the next term. Considering that buying is already cheaper, this is a nonissue.
- Rents May Go Down: Realistically, they are going up. There is little inventory and a lot of competition in the rental market at this time. Within the next 5 years, rents will likely continue to gradually increase.
- $2,200 4br 1,787 sq/ft Calgary Ave
- $2,410 4br 1,488 sq/ft Colby Circle
- $2,000 4br 1,435 sq/ft 1353 Raven Ave (backsup to Victoria)
Note: the payment example is simply an estimation and is not based on actual figures or intended to represent an actual lender quote. Also, closing costs were not included as cash necessary to close. This can be creatively reduced via seller credits.