Why Home Ownership is the Smartest Way to Build Wealth

Many buyers are convinced that waiting will allow them to buy the property at a lower cost. This flawed thinking fails to consider the true costs of home ownership, not only in terms of tax consequences, but also in terms of wealth accumulation.

It's cheaper for me to rent!

How many times have you used/heard that objection?

Right now interest rates are so low that purchasing makes more sense. To illustrate this point, begin by using one of this online "rent versus buy" calculators, According to the U.S. government, the average rate of inflation for the last 10 years is 2.54 percent. Check your local census or multiple listing service data to determine how much properties in your area have appreciated over the last few years as well, or you can give us a call. Furthermore, the longer a person stays in the property, the more substantial the savings are. Here are two examples that illustrate why renting is not usually a smart idea:

Example 1: Assume that you currently pay $1,500 per month in rent and plan to purchase a $300,000 property with $30,000 down and a $270,000 loan for 30 years at 6.25 percent. You are in the 28 percent tax bracket and will own the property for eight years. Appreciation keeps pace with inflation at 2.54 percent per year. The estimated cost of renting is $142,016 versus the estimated cost of buying, which is $117,754.04. You will save $24,262 by purchasing rather than renting.

Example 2: You currently pay $2,000 per month in rent. You plan to purchase a $400,000 property with $40,000 down and a $360,000 loan at 6.25 percent. You are in the 28 percent tax bracket and will own the property for 10 years. The property will appreciate at 5 percent per year. During the 10-year period, the estimated cost of renting is $241,189 as compared to the estimated cost of buying (due to appreciation and equity build up), which is $68,905. You will save $172,284 by buying rather than renting.

What if the prices go down?

Laurence Yun, the chief economist for the National Association of Realtors, shared the following facts at NAR's mid-year conference:
From 1995 to 2004, the average renter accumulated $4,000 of wealth. In contrast, the average homeowner accumulated $184,400. (See his presentation on "Marketing to Gen Next" slide 47 on Realtor.org.) To account for the difference of $180,400 of wealth accumulation, a $300,000 house would have to decline by 60 percent.

What many people fail to consider is that homeowners accumulate wealth by paying down their mortgage, even if their house does not increase in value. Renters lose additional wealth as their rental payments increase over time, whereas a homeowner with a fixed-rate loan has locked in his or her mortgage amount for the next 30 years.

If you would like to see how I can help you in your home buying needs, please give me a call.