One week ago I talked about renting my house. I said that basically my DH and I have been “renting” our home because our home has not appreciated but rather stagnated in price. Granted we’re still fortunate that we are not upside down but what has it cost us?
Our mortgage is $2262/month, Property Taxes $400/month, insurance $20/month, and HOA of $200/month. Total cost of our housing is $2882/month. Principal is $633/month, so $1629/month in interest. That means we are paying $400 + $1629 = $2029/month in deductable payments. We’re in the 25% bracket so we’re actually paying $1522/month to rent our home. Add $20 insurance and $200 HOA we’re looking at $1741/month to “rent” our home.
Thus we’re not paying an outrageous amount to rent our home. It’s a 3 bd/2.5 ba townhouse in a safe neighborhood. Nearby townhouses similar in size are renting for $2500/month. Thus we’re in the right price range. The question to ask is would you be saving the $633/month in principal in a taxable investment account or spending it? I have to honestly answer I think we might be spending part of it and saving some of it.
Another question to ask is what would we be paying in rent? I can safely say that we’d be living in a 2 bedroom apartment in the city at least. We would not be living in a 1 bedroom or studio anymore because I’d want an upgrade from our earlier days of living cheap. When we first move we rented a studio for $1400/month. Thus for $300/month we got 3 bedrooms! I think we’d be paying around $2k for a 2 bedroom, so approximately the same price.
Thus for us, when we ran the calculations with buying versus renting, it made a lot of sense to buy since we felt we’d be staying for a long period of time. Now the only question is can we make enough to cover the closing costs of selling our home? I think if we stay until 2010 we can probably recoup everything.
11 responses so far ↓
1 dogatemyfinances // Jan 14, 2009 at 9:24 am
A small math problem, you would get to deduct your standard deductible anyway, so it’s only a discount when the interest payments go above your standard deductible.
And don’t forget those vultures called the realtors. That’s 6% right there.
2 LAL // Jan 14, 2009 at 10:39 am
That doesn’t come into play the 6% only when I sell. So to break even I need 6% above what I paid, which I think is doable actually this year but definitely next year.
Yep the standard deduction is $10,700. So I would only benefit from the overage which is around $20k * 25% = $5k or $600/month in tax break. Substantial. And $633 “home equity” we’re looking still at around $1600/month rent.
We really are paying close to the going rental rate for our place amazingly. Mostly because the tax break is substantial, and rents are ridiculously high.
$1400/month for a studio in the city is ridiculous and that was in 2005. And that year I had classmates renting 2bd/2ba for $2k/month. Currently everyone I know pays around $2k/month rent. So the problem is rents are expensive.
3 fengshui // Jan 14, 2009 at 1:32 pm
I feel dumb asking this, but what is HOA? You talk about insurance AND HOA. Are they different?
4 fengshui // Jan 14, 2009 at 1:35 pm
But, you also have a roommate. What does he pay? Calculating his rent in, HE is basically paying that principle for you….. You’re still coming out ahead. If he moves out, then you’re going to be paying more. Will he stay there, even after a baby? I’d have to say, that if I were single, and living with married couple with a newborn, that might be a little too much for me….. But everyone is different.
5 FruWiki Meg // Jan 14, 2009 at 1:44 pm
I hate to sound like I’m bragging, but my husband and I did really good getting our house when we did and where we did.
Mortgage, insurance, and taxes all put together, we only pay a little under $1000 a month TOTAL for our 1800 square foot, 3/2 house. That’s in a nice neighborhood within the city limits — and in a city that’s been named the best place to live!
I don’t know what it’s like to rent a house around here or even a 3 bedroom apartment, but we’ve had friends pay that much for smaller 2 bedroom apartments and $650 is about the lowest you can get a half decent 2 bedroom apartment for here.
It gets even better, though, since our current roommate pays $450 a month (though utilities and internet are included). So, we pay about $500 a month while she’s living with us.
And the best news, our house value has actually gone up a good bit since we bought it a few years ago, so we’ll be able to refi it and the rest of our debt at 5% assuming our inspection works out in 3 weeks and there aren’t any other surprises. We have a good bit of renovation work to finish up before then, but we got some great deals on that, too, and so far it looks really good.
6 LAL // Jan 14, 2009 at 2:54 pm
HOA is home owners association, we own a townhouse.
Nope the roommate is moving out this summer. A lot of pretty nasty things happened to him that caused him to stay longer than intended. Including a “friend” ditching him to buy a place instead of renting together. Another friend deciding to move in with significant other instead of him. And by the time that all panned out, a year had passed and he did not get the career he’s always wanted. Thus he was down on his luck and we said stay until you figure it out.
He pays $500/month + utilities. It’s not like we ever counted the money. It really just pays property taxes.
Meg, I wish we lived in a lower COLA place. Your house sounds nice. One day, we’re going to live somewhere cheap, it’s a goal. THEN we can own a house too!
Right now it’s still a good deal considering what rent is. I know our roommate was looking to rent and with us he’s paying about 50% less than he would be. He’s a good guy and I think good karma will follow. And at least as a friend he pays “rent”.
My BIL lived with us and never paid a thing. Sigh. Family.
And he knew he was always moving out in 2 years. His visa is up anyway.
7 Miss M // Jan 15, 2009 at 6:32 pm
Vis a vis the standard deduction – usually when you are a renter you have deductible expenses, just not enough to exceed the standard write-off. The mortgage interest and property taxes lift you over that hurdle and then you can also deduct all those other things like state income taxes, medical expenses etc. In my case, these various other deductions equal the standard deduction and your rent calculation would be correct.
My total mortgage payment is $2400, minus the ~$500 in reduced taxes puts my “rent” at $1900. This is a little higher than the going rent in the neighborhood. The cost to own versus renting has been out of whack in LA for awhile
8 LivingAlmostLarge // Jan 15, 2009 at 8:31 pm
Miss M, what is your monthly equity savings?
10 boston renter // Jan 25, 2009 at 10:16 pm
Did you include maintenance costs in your calculations? Are they covered by you HOA? As a renter I haven’t had to pay for anything and I needed a replacement refrigerator, garbage disposal, and several plumbing problems in the last several years.
11 LivingAlmostLarge // Jan 26, 2009 at 7:57 am
We bought our place specifically because our maintenance is minimal compared to most places because it was newly renovated. So I think we haven’t spent anything on fridge, garbage, etc. We installed a gas fireplace but we didn’t need to.
New furance, new water heater, etc. We put in a new retaining wall but that again was a choice, not a necessity and cost us a lot less because our neighbors wanted it, so they paid for the bulk.
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