Financial Advantages Of Owning Real Estate

Dated: June 11 2019

Views: 2250

Rent vs. Buy??

What are the benefits of actually having your name on a piece of property where you live? Are there any disadvantages? There are things thats I hear on a daily basis. Let me start by sharing an example.

2 Months ago I got one of my very good friends an apartment for him and one of his buddies in a really nice spot in the city. The monthly rent was $4,000. In order for them to move in they needed to pay $16,000 up front. This included first months rent, last months rent, a security deposit, and a broker's fee. For the next 10 Months (already paid first and last) they will be responsible for $2,000, not including their utilities. This is the same downpayment for a $400,000 at 4%. Now to client #2. He chose to take a different path. He chose to buy a 3-unit property outside of the city and have two of his friends occupy the other 2 units he was not planning to live in. We purchased the house for $415,000 and his down payment was $14,525 or 3.5% down using an FHA first time buyers loan (It was a nice house that needed some minor cosmetic work). His monthly mortgage payment in total was $2,605 (principal, interest, taxes, PMI, and insurance for the building). The rent on the first floor is $1100 and the rent on the second floor $875. That left $630 left for him to cover toward his mortgage every month which he will be splitting with his girlfriend, leaving him to pay $330/month in living expenses. $2000/month to live in the city vs. $330/month to live in the suburbs with others helping pay your mortgage. BIG Difference

Of course both of these scenarios draw up very different lifestyles, commutes, locations, etc. but I am just trying to put things into perspective for you. 

So, Which is smarter? Let's do some advantages and disadvantages.

Advantages of Renting: 

-No repair costs (to an extent) If you break the toilet at a party, you are paying for a new toilet. If the heating is not working, the landlord will be required to fix it. 

-No RE Taxes paid. All taxes are paid by the landlord, unless you are working in a commercial space you may be responsible for taxes. 

-Flexibility to move or upsize/downsize. You can essentially move at the drop of a hat. Even if you had to break the lease, you usually just pay a fine and you are on your way. 

-Low maintenance. All maintenance and up-keep is usually done by the landlord. Unless you want your room to be hot pink, that will be your problem. 

Disadvantages of Renting: 

-No tax write-offs or advantages

-No future return on investment or appreciation (No matter what kind of property that you buy, it is an investment - it does not have to be a rental property to be an investment)

-A landlord that can tell you what you can, and can not do (pets, parties, renovations, use of space, parking, etc.)

-Wasted money with no chance of getting any ROI on rent money paid. 

Advantages of ownership:

-Endless potential for ROI. Mostly in the form of appreciation of the house over time. 

-Invested money vs. spent money

-Tax write offs. You are able to write off all mortgage interest paid (Which makes up about 75% of your mortgage payment for the first few years and declining as years go by) and the depreciation of the building. See Below:

Date Payment Interest Principal Remaining Balance
6/2019 $1,935.09 $1,368.29 $566.80 $399,908.20
7/2019 $1,935.09 $1,366.35 $568.74 $399,339.47
8/2019 $1,935.09 $1,364.41 $570.68 $398,768.79
9/2019 $1,935.09 $1,362.46 $572.63 $398,196.16
10/2019 $1,935.09 $1,360.50 $574.59 $397,621.57

***This is a table of Client #2's mortgage payment breakdown. The $1,368 he paid towards interest is a tax write off. That is about $16,000 in write-offs in your first year. Depending on what tax bracket you are in, this equates to about $4,000-$5,000 in saved money. Set this money aside and           in a few years you will have enough to buy another property!

-Pride of ownership

-90% of the time it is cheaper than renting. We know this because if it wasn't, the landlord would not be able to make any profit after collecting the rent and paying his mortgage payment if not.

-EQUITY (What the property value is worth minus what is owed) For example if your house is worth $500,000, and you only owe $350,000 to the bank, you have $150,000 in equity. This is YOUR money. You can leverage this money to take out a line of credit from the bank, or you can sell and have full access to this money. Minus long/short term capital gains of course. Every month when you pay your mortgage you are paying down a portion of your principal loan amount, thus increasing your equity with every payment. You are basically paying yourself in a roundabout way. 

-Owning a future rental property and asset to pass down to family members and/or offspring. If for some reason you have to move out or away - you too can rent this property to someone like my buddies and make a few extra bucks a month!

-Sense of community. It is likely you are not going to be best friends with your rental neighbors because they are changing so frequently. In a property you own you will build relationships with those around you.

Disadvantages of Ownership:

-Repairs. You will be responsible for the upkeep of the building, heating, electrical, plumbing, etc. This can be costly if you need to make a lot of repairs. (And trust me boilers do not break on 4th of July.)

-RE Taxes (They usually go up, especially in MA) The taxes on Client #2's house were $3900/year. I included about $400 per month in the monthly payment to account for taxes. 

-Limited flexibility. Although, the sale of a house can take as little as 21 days, it is likely you can not clean and clear out of a house in 21 days unless you really had somewhere to be. 

Some people spend their entire life living in a rental property, and there is absolutely nothing wrong with that. There are some people that travel a ton for work and do not have the time to take care of a house, or maybe someone is planning to live in a new city every year for the rest of their life. The moral of the story is there is no right or wrong for one single person and you should always do what is best for you and your family. Whether that is living in a single family in the suburbs with a fenced in backyard, or a 2 bed 2 bath condo with no parking in the city. Only you can decide what is best for you. I will leave the decision up to you, and direct any questions to me!

Please do not hesitate to reach out!

-Nathan J. Rock

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