What Do the Numbers Say?
Homebuyer Associates August (Part 2) 2011 E-Note
Homebuyer Associates www.homebuyerassociates.com
414.254.4129 homebuyeba@gmail.com
Michael D. Holloway/Seamus Holloway/Paul Wollersheim
What Do the Numbers Say?
In Part 1 of my August E-Note (.94 cents vs. $1.24) I outlined why property ownership makes more sense to me than renting. My research also confirmed that information should trump emotion when making buying decisions (homes and other things).
Years ago when I would purchase duplex investment properties – not homesteads but investments – I would prepare a pro-forma which would indicate the potential return on my investment. If the return was less than 9% it was not worth the risk. If the return was 14% or greater then it was worth the risk and anywhere in-between was a case-by-case basis.
Occasionally someone would say, “you paid too much for that duplex” to which I’d reply, “the numbers worked.” I’d gathered my information and the revenue was going to cover my expenses long-term. I once even paid more for a home than it was worth. I wanted a cream city brick house (emotion) but even at the higher price “the numbers worked” (information).
And so it is with buying vs. renting. Do the numbers work? If you can rent a home or condominium for significantly less (I define that as 20% +) than owning then it may make sense to rent.
On the other hand, with prices low and mortgage rates at historic lows, it is a very good time to lock in housing costs – if you believe you will be in the home for 5 or more years. Even with the most recent Fiserv data showing home prices in the Milwaukee area are down 5.5% from last year (that would be a value loss of $12,250 in my example below) your costs increase that much or more if rates rise 1.5%. The property has to be purchased at the lower end of the value spectrum to limit risk and for the “numbers to work.”
In the majority of purchases Homebuyer Associate clients have made this year the lender’s appraiser appraised the homes for more than our clients paid – which is good for our clients. In one instance the lender had to send the file back to underwriting for a second review because the appraiser was valuing the home for $30,000 more than our client was paying. I asked the lender not to punish my client because Homebuyer Associates did their job as Exclusive Buyer Agents.
Below is one example of the cost of a home with 3 bedrooms or a condo with 2 bedrooms and den. If you are able to rent that same space for $1,300 then it might make sense for you to continue renting especially if you will be a lifelong renter and have the discipline to invest the difference in cost. If you can’t rent that space for $1,300, don’t have the discipline or if you want to own someday, then you need to study the numbers.
Purchase: $245,000 – $15,000 (down payment) equals $230,000 (mortgage) $230,000 @4.25% at 30 years: $ 1,131
Taxes: $ 516
Insurance: $ 50
Maintenance: $ 200
Subtotal: $ 1,897
(less your tax deduction of $250)
Total: $ 1,647
On the surface it’s easy to see that the cost to own is a bit less than the cost to rent. However, after 5 years you will have paid down your mortgage by $21,000. If you rented you would have helped pay down your landlord’s mortgage by making rent payments of $100,800.
As an aside – and I’ve never done this before in an E-Note or Newsletter – I know of 4 good condominium buys in the downtown market priced between $345,000 and $475,000. That is not what a buyer will pay. My best guess is the buyer will pay between $325,000 and $425,000 respectively. With mortgage rates in the area of 4% the numbers work.
Thanks for reading.