Renting vs Buying a Home

Silicon Valley Real Estate | JLee Realty

Buy And Own For 7 Years

Purchase price $1,250,000
Down payment $250,000
Interest rate 3.4%
Total interest for 7 years -$281,494
Property tax for 7 years -$105,000
Repairs for 7 years -$31,250
Income tax deduction (~30%) +$75,640
Net cost -$342,104
Appreciation (6.1% per year) +$513,588
Wealth +171,484

Rent For 7 Years

Monthly rent $3,500
Total rent for 7 years -$294,000
Wealth -$294,000
If you had bought vs. rent, you would be $465,484 wealthier

(6.1% actual average house value appreciation per year from 1998 to 2020 in Santa Clara County)

*Check with a tax professional about your tax savings!

Making a Rent vs Buy Decision

There are many "calculators" used to compare renting versus buying. There are strong financial reasons for owning rather than renting. The difference in wealth between the average homeowner and the average non-homeowner in the U.S. is quite large, with much of it due to owning a home.

An investor owning a home to rent out has additional factors when deciding to own or continue owning it:

  1. The property owner may have bought the home a long time ago and his property tax is lower than what you, as a new homeowner would pay.
  2. For the investor owner, costs of repairs are tax deductible against rental income.
  3. Appreciation isn't subject to current income taxes until the property is sold.
  4. The investor owner can improve the property creating wealth for himself, deducting the cost of improvements against rental income.
  5. Capital gains (investment) taxes are generally lower than income taxes due on salary or pay.
  6. If home prices are falling, you won't want to suffer a near term loss of home equity but the investor owner believes he can "ride-out" the cycle.

Rent vs Buy Calculators

Two good rent vs buy calculators are:

Interest Rates - Rent vs. Buy

Home mortgage interest rates affect the choice between renting versus buying. A good way to estimate current interest rates is to refer to the current Consumer Financial Protection Bureau's explore interest rates.

If you want to see interest rate trends, the FreddieMac PMMS is an excellent source.

Call Juliana... Start packing!