A question we are often asked, mainly by individuals who rent a home from us, is “Should we buy a home instead of renting?” In the past, popular belief would be “absolutely” however times have changed and the answer is not as easy as it once used to be. The trend today, especially by millennials and baby boomers, is to rent.
We are not going to offer our opinion because the truth is; the answer is not the same for everyone. It depends on where you live in the United States at a given time. Appreciation, rental rates, size of house, tax strategies ect… can all affect someone’s decision, however we will break down the basics and the financials of owning versus renting in Oklahoma on a $200,000 property in Broken Arrow, OK, which is a bedroom community outside of Tulsa, OK and is a good indicator of other areas throughout Oklahoma.
Renting
Showing the numbers and the costs of renting is pretty simple because other than rent, there are hardly any other costs associated with renting; especially of you take care of the property.
Monthly Rent = $1,300
Annual Rent = $15,600
*Does not include interest earned on money not spent on a down payment of buying a home.
Owning
Many more factors are involved regarding owning a home because of down payments, taxes, appreciation and mortgage interest but the premise of dollars out is the same. We are not going to calculate the mortgage payment because of the principal paid; we only calculate money that is paid out and is not recouped later. These are true costs that are gone for good.
Costs
Monthly Interest =$1,050 (6% interest used for the calculations over a 30 year period)
Annual Interest = $12,600
Annual HOA dues = $300
Annual Taxes = $2496
Annual Insurance = $1,920
Total Annual Cost = $17,316
* Does not assume the money paid for the down payment to finance the home.
Repair and maintenance costs associated with owning a home
Monthly Maintenance Costs = $150
Annual Maintenance Cost = $1,800
So, your total costs for owning a home over the course of a year equals $19,116
As you can see, it costs more to own a home, not to mention the funds spent on the initial purchase of the home BUT what about the advantages?
Mortgage Deduction
Let’s assume you make $100,000 combined income and your tax bracket is 20%.
Income = $100,000 at 20% = $20,000
Mortgage Interest Deduction = 12,600
Adjusted Income = $87,400 at 20% = 17,480
$20,000 minus $17,480 = $2,520 tax savings
Your total annual net cost now goes from $19,116 to $16,596
Appreciation (maybe)
Won’t I make money when I sell the house? The answer is maybe. You could lose money. The 2008 recession caused millions of homeowners to lose money and I was one of those homeowners. I bought a house for $275,000 and lived there for seven years. The market value before 2008 was $330,000 but after 2008 the market value dipped to $250,000. So, lets assume a .5% appreciation over a 20-year period, which is 10%. 10% of $200,000 = $20,000 / 20 years = $1,000 year. That now brings your total annual net cost to $15,596.
This of course assumes that your home appreciates. This is one of the major factors that millennials want to rent. They saw their parents go through the 2008 home crisis.
Summary
As you can see from the example above, leasing is not necessarily more expensive than owning a home. It might seem that I advocate leasing over owning. I don’t, I am a homeowner today, but I do not own my home. I am leasing it from the state (taxes) and from the bank (interest). I don’t have to worry about having to leave my home or dealing with a landlord but I do wonder what it would feel like to have the freedom to just get up and move somewhere else or not fixing crap when it breaks. There are pros and cons to both options but the costs are comparable. Some markets might cost less to lease and others it could cost more to own. The choice is yours, so do the math.
If you’re looking for investment property opportunities and/or property manager in Tulsa, Oklahoma, we hope you will give us a call. We’d love the opportunity to talk to you and let you know what we can do to help manage your property in the Tulsa market. Please contact us at Renters Place and we’ll show you what makes us different when it comes to Tulsa property management.
918-728-8080 / info@rentersplace.com
