Renting Versus Owning

In today's depressed rental market, first time home buyers frequently compare the cost of rent to the cost of a mortgage payment and wonder how they can possibly make it work. Typically, the monthly cost of renting a given home will appear be hundreds of dollars less than purchasing it.

But as is frequently the case, things are not always as they seem. Purchasing a home will often cost close the same as renting it, after you factor in the tax benefits of mortgage interest deductions.

This case study explores the real life experience of one of our clients in 2004 who swore they couldn't own a home:

"Nathan," they told me. "There's no way we can afford to purchase right now. With only a few thousand dollars saved for a down payment, the math just doesn't make sense! Look at the numbers - it's going to cost nearly an extra $600 per month."

Monthly Rent on Our 2 Bedroom 1 Bath Walnut Creek Apartment:	$1,475.00
Monthly Renter's Insurance:	$30.00
Total Monthly Cost to Rent:	$1,505.00
Monthly Interest Only Mortgage on a $360,000 2 Bedroom 2 Bath Pleasant Hill Condo:	$1,450.00
Monthly HOA Dues:	$210.00
Monthly Condo Owner's Insurance:	$30.00
Monthly Property Taxes:	$400.00
Total Monthly Cost to Own:	$2,090.00

What they didn't realize is that without any significant tax deductions to itemize, Uncle Sam is taking them to the cleaners. 100% of mortgage interest paid on your primary residence is tax deductible! At their 33% tax bracket, they should have added the following item to their calculation:

Total Monthly Cost to Own:	$2,090.00
Monthly Mortgage Interest Deduction (33% of $1,450.00 interest only mortgage payment):	$478.50
TRUE Total Monthly Cost to Own:	$1,611.50

After factoring in the tax benefits of home ownership, they were able to fire their landlord and move into their very own home for only $106.50 more per month. Plus, the home they were moving into was far NICER than their apartment with an extra bath, a private patio and two assigned covered parking spaces.

This also does not take into account the long term financial gains that will likely be made on the property in the form of appreciation. A conservative estimate of 7% annual appreciation (some area in California are currently experiencing 15-20% annual appreciation) means that their home is going to over $25,000 more at the end of their first year.

If you still don't believe us, plug your own numbers into this renting vs. buying calculator and see for yourself.