Wednesday, January 25, 2006

Buy Versus Rent

Here's something strange.
Rent for a house in NW Portland is now less than interest on a mortgage by a good amount.
Consider a $500K house.
1 mo interest = $2500 (NOT principal. This is just the interest)
(6%)
Rent is about $1600/mo.
If you rented a house for 5 years, you could pocket $900/mo = $54,000 that would've gone to interest.
If the house has appreciated less than 10% over that time, you would have fared better saving your money and renting). In this market, many would make that bet.
But...
As a renter, you do also get interest on the principal portion you would have paid out over the 5 years had you been making mortgage payments, but that's a wash because you're also paying less interest on the mortgage as you pay principal. It's close to a wash. You also get interest on the $54K saved vs paying interest as it accumulates, but only a couple thousand.
Also, you don't pay property taxes (another $25K over 5 years). Insurance is another $5K.
Add it all up and you save probably at least 100K over 5 years by not buying.
That's 20% of the purchase price. You would have $100,000 more in 5 years if you rent. (Not counting money that would have gone to pay principal. Just money that would've gone to pay interest and other owner expenses versus being a renter).
It looks like buying a house is quite a nasty speculation right now.

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