Monday, February 20, 2012

Renting vs. Buying: 5 and 10 Year Case Studies

Many people today shy away from buying because they can't fathom spending so much money on one thing. But rarely do they think of how much they have to spend on rent (you have to live somewhere!).

The following case studies are 5 and 10 year case studies of the money you would spend renting, and the money you would spend buying:

Buying after 5 and 10 years:
Say you buy a $200,000 home with 3.5% down. Your monthly payment will be about $1100.

  • After 5 years your loan is down from $193,000 to $169,000.
  • After 10 years your loan is down to $145,000. 

Renting after 5 and 10 years:
Renting the same type of house that is worth $200,000 would cost you more as a renter, at least $1200 or $1300, not counting rent increases each year:

  • After 5 years, you will have spent $72,000 in rent.
  • After 10 years you will have spent $144,000
  • You also will have spent $1200 on the initial deposit, which you may or may not get back.

Your situation after renting: 

  • You still do not own the house.
  • You will never be able to recoup the rent money you spent: it paid someone else's loan, and you can't sell the house because it's not yours. 
  • Rent most likely went up over the years, which cost you even more money.
  • Your credit score will not have been improved whatsoever by all your on-time rental payments.

Your situation after buying:

  • You have $30,000 of equity in your home after 5 years.
  • You have $55,000 of equity in your home after 10 years.
  • You can rent it out, make about $200-$300/month on your renters after you pay the mortgage, and buy a bigger home.
  • You can sell the home, and even in the worst case scenario if you don't make any money, you will have lived for free for 5-10 years. 
  • If you do make a just made a profit!
  • If you stay in the house and keep paying your mortgage, you will keep paying your loan down.
  • If you make an extra $100 payment per month, your loan will drastically go down faster. 
  • If you rent it out, someone else will pay your loan for you, and after the loan is paid off, you can keep it as an investment property and make $1250/month, which is $15,000 per year. 

The moral of the story is that a buyer has PLENTY of great financial options when owning, but a renter has no options or benefit after renting for several years. Don't forget, renting costs you MORE MONEY!