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Why Owning Beats Renting
Question: I can rent for less than the cost of buying a home. Doesn’t that make renting a better housing option?
Answer: In some situations, at some times and in some places, yes, but in the general case ownership has an edge. For instance, one of the perks of old age can be significant wealth for those who bought real estate long, long ago.
According to Freddie Mac, “today’s 65-year-old who bought the ‘average’ house at age 30 has seen the value of that house increase 3.7 times. Assuming a 20 percent down payment, a reasonable number of refinances to take advantage of declining mortgage rates and the impact of the mortgage interest tax deduction, the rate of return on this investment is hard to beat. For many older folks, these literally are the golden years.”
From the example created by Freddie Mac, let’s imagine that someone bought a house when they were 30 and that they are now 65 years old. Let’s say that 35 years ago the property’s value was $100,000 and that today it can be sold for $370,000.
At first it seems that we have a $270,000 profit, and in one sense that’s true – in cash terms $370,000 less $100,000 is certainly $270,000. Realistically, however, it’s not entirely correct.
Here’s why. According to the Bureau of Labor Statistics, it now takes $265,168 to buy the same bundle of goods and services that could have been purchased in 1981 (35 years ago) for $100,000. In other words, part of the apparent increase in value is not in the form of more buying power. Instead, it’s the result of inflation and the need to pay more paper dollars.
It might seem that because of inflation, the homebuyer really didn’t do as well as today’s $370,000 home value might suggest. That’s true. However, the homebuyer did not pay $100,000 for the property. Instead, the buyer bought with 20 percent down, or $20,000 in this example.
Go back to our two options: buying or renting. The tenant obviously pays rent, and you can expect that rent will go up along with home values if they rise. The buyer purchased with $20,000 down and an $80,000 mortgage. The cost of that mortgage – and the lost economic opportunities associated with that $20,000 down payment – are really a form of “rent” that allows the purchaser to live indoors. I think of mortgage payments as a type of rent because if the owner did not own they would instead pay for a lease.
We can now begin to see the real benefits of real estate ownership. The owner did see an increase in real buying power in the Freddie Mac example – $370,000 less $265,168 is $104,832, a benefit not available to tenants. However, neither rising real estate values nor increasing stock market prices are a sure thing. Values can and do fall. No less important, as they say on Wall Street, past performance does not guarantee future
Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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