fulford@altos.dec.com (Mike Fulford, MS: UCC, DTN: 544-1313) (10/10/86)
The following analysis was obtained the Consumer Reports magazine, May 81. Is it cheaper to rent an apartment or own a home? Everyone has a different answer here, of course. The truth is, like a car, stereo, or a yacht, a home is a utility investment. The standard of living of course is much higher than renting, but then so is the cost. Probably the widest economic myth in America is that "owning a home will be the best investment that you will ever make." Just ask your parents they will tell you that without a second thought (parents are by default economics experts as all during your life as a child they taught you what you could and could not afford!) Owning your home and living in it until paid for, or using it as income property, is a different case indeed. What this is about is the pure economics of buying, living in, and selling your home. Take for instance a single peron with a net worth of < 30K, making $30K/year. Would it be worth it to him to buy and live in a financed home? That all depends on many things. In a purly monitary sense, he could come out miles ahead by renting and investing the extra monies in better investments. The following is a summary of the diffence in costs between owning an average sized home, in an average suburban mid-USA setting, to an 2 bedroom apartment in the same area. Here's the story dollar by dollar. The bottom line answer may surprise you: ------------------------------------------------------------------------- General terms- these are national averages from 1970-1980 and are not to be used as a comparison with your own situation. ------------------------------------------------------------------------- Inflation- is calculated in every line entry unless otherwise averaged (the averaged rate of inflation for the years 1976-1986 was 7.15%.) This is not to say that the this example is a reflection of those exact years! Proper investing- a 7% yield after taxes is considered to be par. The apartment is a large two bedroom, 2 bath, 2 carport, in midtown USA The house is a 3 bedroom, 2 bath, two car garage, with average 1/10 acre of yard space. Bought in 1970 for $50,000, and sold in 1980 for $100,000 in midtown USA, and has 1000 cu/ft more space than the apartment Value of house- keeps pace with the average inflation rate of 7.15% (as do the property taxes) Profit- this is the nominal profit of $50,000 (before the real costs) Taxes on profit- not taxed as it is assumed to be reinvested ------------------------------------------------------------------------- Renters world ------------------------------------------------------------------------ Rent of $300/month for the first year with 7.15% increases every year. Insurance- fully covered average of $100/year Rent deposit- $300 Renters credit- average tax savings of $20/year Utilites- inflation averaged at $50/month ------------------------------------------------------------------------- Cost of living in the financed home ------------------------------------------------------------------------- Down payment- average of 20%= $10,200 ($51,000 - 10,200= 40,800 financed) Closing costs- 1975 average of $4700 (again, a stray example!) Interest- 13% fixed Points= 2 ($1,000 added to the $50,000 price, in this case the $1K was sutracted from the down payment. I had to stick with my reference material!) Legal fees- $75 Inspections- $50 Interest- 98% first year, 97%, 95%, 93%, 90%, 85%, 80%, 74%, 69%, 62% are close to the norm of a simple interest mortgage. Property taxes- at a national of average of 1.72% Interest write off- State and Fed combined average bracket of 30% (less the average deductable of $1750) Insurance- fully covered average of $200/year, national average. Payments- monthly mortgage payments for 30 years of $425/month Maintenance- outside, inside, appliances- inflation averaged at $100/mo. Garbage pickup- inflation averaged at $5/month, national avarage. Sewage- inflation averaged at $2/month, natioal average. Water- 20/month national average. Utilities- heat, cooling, electric, hot water, ect- inflation averaged at $175/ month, national average. Tax preparation- average of $200/year, national average. Time as money- every hour of someones time has an economic worth. A rate of $10/hour is used here. For example, a well off person may have a maid, plumber, gardener, ect, and would not spend thier time on homeowners drudgeries (they could be playing the financial markets with the extra time, ect), whereas thier average rate of pay may be $10/hour. Persons not so well off would of course do the work themselves (or pawn it off on the wife and kid... but we won't get into those economics!) ------------------------------------------------------------------------- National average of time spent on homeownering- Time dealing with appraisers- 1 hour/year Time shopping and buying for- House itself- 50 hours Lawyer- 5 hours Financing- 15 hours Tax preparation & and general home owner financial managment- 1 hour/mo Permits, inspections, ect- 5/year Maintenance- Yardwork- 4 hours/week Interior work- 2 hours/week Shopping for home related items- 1 hour/week Dealing with contractors, ect- 5 hours/year Total time/year= 457 hours= $4,570 of worth of work. ===================================+===================================== First year homeowners costs | First year renters costs -----------------------------------+------------------------------------- Down payment= 10,200 | Rent= 3,600 Payments= 5,100 | Deposit= 300 Closing costs= 4,700 | Utilities= 600 Time in money= 4,570 | Insurance= 100 Utilities= 2,100 | ----- Maintenance= 1,200 | Nominal total= 4,600 Property taxes= 920 | Insurance= 200 | Minus renters Tax preparation= 200 | tax credit= 20 Water= 240 | ----- Legal fees= 75 | Real total= 4,580 Trash= 60 | Inspections= 50 | Sewage= 24 | ------- Nominal total= 29,639 Tax savings= 4,952 (writing off closing costs, interest, property taxes ------ and tax preparation) Real total cost=24,687 Homeowners real cost minus renters real cost= amount avaliable to invest= 20,107 Properly invested= difference of 21,514 ===================================+========================================= Second year homeowners costs | Renters costs -----------------------------------+----------------------------------------- Payments= 5,100 | Rent= 3,857 Time in money= 3,705 | Insurance= 100 Utilities= 2,100 | Utilities= 600 Maintenance= 1,200 | ----- Property taxes= 1,007 | Nominal total= 4,557 Insurance= 200 | Tax preparation= 200 | Minus renters 4,557 Water= 240 | tax credit= 20 Trash= 60 | ----- Sewage= 24 | Real total= 4,537 ----- Nominal total= 13,836 Tax savings= 2,752 (writing off interest, property taxes, ------ and tax preparation) Real total cost= 11,083 Homeowners real cost minus renters real cost= amount avaliable to invest= 6,546 Invested return for first year= 23,019 Plus return for second year= 7,004 ====== Total return on investment= 30,023 -----------------------------------------+----------------------------------- Third year homeowner costs= | Renters costs= -----------------------------------------+----------------------------------- Payments= 5,100 | Rent= 4,132 Time in money= 3,705 | Utilities= 600 Utilities= 2,100 | Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,058 | Nominal total= 4,832 Water= 240 | Insurance= 200 | Minus renters Tax preparation= 200 | tax credit= 20 Trash= 60 | ----- Sewage= 24 | 4,812 ------ Nominal total= 13,887 Tax savings= 2,696 (writing off interest, property taxes, ------ and tax preparation) Real total= 11,191 Minus renters costs= amount avaliable for investment= 6,379 Amount from last two years= 32,124 Plus this years return= 6,825 ------ Total return on investment= 38,949 -------------------------------------+-------------------------------- Fourth year homeowner costs |Renters costs -------------------------------------+-------------------------------- Payments= 5,100 |Rent= 4,427 Time in money= 3,705 |Utilities= 600 Utilities= 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,133 |Total= 5,127 Water= 240 | Insurance= 200 |Minus renters Tax preparation= 200 |tax credit= 20 Trash= 60 | ----- Sewage= 24 |Real total= 5,207 ------ Nominal total= 13,962 Minus tax 2,466 (writing off interest, property taxes, savings= ------ and tax preparation) Real costs= 11,495 Minus renters costs= amount avaliable to invest= 6,388 Amount return from last years savings= 41,675 Plus amount from this years return= 6,835 ------ Total return on savings= 48,510 --------------------------------+--------------------------------- Fifth year homeowners costs |Renters costs --------------------------------+--------------------------------- Payments= 5,100 |Rent= 4,743 Time in money= 3,705 |Utilities= 600 Utilities= 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,214 |Total= 5,443 Water= 240 | Insurance= 200 |Minus renters Tax preparation= 200 |tax credit= 20 Trash= 60 | ----- Sewage= 24 |Real total= 5,423 ----- Nominal total= 14,043 Minus tax 2,276 (writing off interest, property taxes, savings= ------ and tax preparation) Real costs= 11,766 Minus renters costs= amount avaliable to invest= 6,343 Amount return from last years savings= 51,905 Plus amount from this years savings= 6,787 ------ Total return on savings 58,692 ----------------------------------+---------------------------------- Sixth year homeowners costs |Renters costs ----------------------------------+---------------------------------- Payments= 5,100 |Rent= 5,075 Time in money= 3,705 |Utilities= 600 Utilities 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,298 |Total= 5,775 Water= 240 | Insurance= 200 |Minus renters Tax preparation= 200 |tax credit= 20 Trash= 60 | ----- Sewage= 24 |Real total= 5,755 ----- Nominal total= 14,127 Minus tax 2,139 savings= ------ Real total= 11,987 Minus renters cost= amount avaliable to invest= 6,232 Amount return from last years savings= 55,538 Plus amount from this years savings= 6,668 ------ Total return on savings= 62,206 -------------------------------------+---------------------------- Seventh year homeowner costs/year |Renters costs -------------------------------------+---------------------------- Payments= 5,100 |Rent= 5,437 Time in money= 3,705 |Utilities= 600 Utilities= 1,200 |Insurance= 100 Maintenance= 2,100 | ----- Property taxes= 1,301 |Total= 6,137 Water= 240 | Insurance= 200 |Minus renters 20 Tax preparaton= 200 |tax credit= ----- Trash= 60 |Real total= 6,117 Sewage= 24 ------ Nominal total= 14,130 Minus tax 2,011 (writing off interest, property taxes, savings= ------ and tax preparation) Real costs= 12,119 Minus renters costs= amount avaliable to invest= 6,002 Amount return from last years savings= 66,560 Plus amount from this years return= 6,656 ------ Total return on savings= 73,216 ------------------------------------+--------------------------- Eighth years homeowners costs/year |Renters costs ------------------------------------+--------------------------- Payments= 5,100 |Rent= 5,825 Time in money= 3,705 |Utilities= 600 Utilities= 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,494 |Total= 6,525 Water= 240 | Insurance= 200 |Minus renters 20 Tax preparation= 200 |tax credits= ----- Trash= 60 |Real total= 6,505 Sewage= 24 ------ Nominal total= 14,323 Minus tax 1,854 (writing off interest, property taxes, savings= ------ and tax preparation) Real total= 12,469 Minus renters costs= amount avaliable to invest= 5,964 Amount return from last years savings= 78,341 Plus amount from this years return= 6,831 ------ Total return on savings= 85,172 -------------------------------------+----------------------------- Ninth year homeowners costs/year |Renters costs -------------------------------------+----------------------------- Payments= 5,100 |Rent= 6,241 Time in money= 3,705 |Utilities= 600 Utilities= 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,600 |Total= 6,941 Water= 240 | Insurance= 200 |Minus renters 20 Tax preparation= 200 |tax credit= ----- Trash= 60 |Real cost= 6,921 Sewage= 24 ------ Nominal total= 14,429 Minus tax 1,742 (writing off interest, property taxes, savings= ------ and tax preparation) Real total= 12,686 Minus renters costs= amount avaliable to invest= 5,765 Amount return from last years savings= 91,134 Plus amount from this years return= 6,168 ------ Total return on savings= 97,302 ---------------------------------------+--------------------------- Tenth years homeowners costs/year |Renters costs ---------------------------------------+--------------------------- Payments= 5,100 |Rent= 6,241 Time in money= 3,705 |Utilities 600 Utilities= 2,100 |Insurance= 100 Maintenance= 1,200 | ----- Property taxes= 1,715 |Total= 6,941 Water= 240 | Insurance= 200 |Minus renters 20 Tax preparation= 200 |tax credit= ----- Trash= 60 |Real total= 6,921 Sewage= 24 ------ Nominal total= 14,544 Minus tax 1,637 (writing off interest, property taxes, savings= ------ and tax preparation) Real total= 12,907 Minus renters costs= amount avaliable to invest= 5,986 Amount return from last years savings= 104,113 Plus amount from this years return= 6,405 ------- Total return on savings= 110,518 ------------------------------------------------------------------- House sold for= 100,000 Price bought for= 50,000 ------- Profit= 50,000 Total amount saved by renting= 110,518 Minus profit from selling home= 50,000 (non-taxable as reinvested) ------- Amount the finaced home cost 60,518 over the cost of renting= (or the amount you would have in your portfolio if you would have rented instead of financed a house.)
king@kestrel.ARPA (Dick King) (10/12/86)
From: fulford@altos.dec.com (Mike Fulford, MS: UCC, DTN: 544-1313) Newsgroups: net.taxes Date: 10 Oct 86 19:57:24 GMT Sender: daemon@decwrl.DEC.COM The following analysis was obtained the Consumer Reports magazine, May 81. Proper investing- a 7% yield after taxes is considered to be par. The apartment is a large two bedroom, 2 bath, 2 carport, in midtown USA The house is a 3 bedroom, 2 bath, two car garage, with average 1/10 acre of yard space. Bought in 1970 for $50,000, and sold in 1980 for $100,000 in midtown USA, and has 1000 cu/ft more space than the apartment Why are you comparing a 2BR, 2 carPORT apartment with a 3BR, 2 car GARAGE house? Go all the way, compare a studio apartment with a mansion, and REALLY make the renter come out ahead! ------------------------------------------------------------------------- National average of time spent on homeownering- Time dealing with appraisers- 1 hour/year Time shopping and buying for- House itself- 50 hours Lawyer- 5 hours Financing- 15 hours Tax preparation & and general home owner financial managment- 1 hour/mo Permits, inspections, ect- 5/year Maintenance- Yardwork- 4 hours/week Interior work- 2 hours/week Shopping for home related items- 1 hour/week Dealing with contractors, ect- 5 hours/year Total time/year= 457 hours= $4,570 of worth of work. ===================================+===================================== First year homeowners costs | First year renters costs -----------------------------------+------------------------------------- Down payment= 10,200 | Rent= 3,600 Payments= 5,100 | Deposit= 300 Closing costs= 4,700 | Utilities= 600 Time in money= 4,570 | Insurance= 100 Utilities= 2,100 | ----- Maintenance= 1,200 | Nominal total= 4,600 Property taxes= 920 | Insurance= 200 | Minus renters Tax preparation= 200 | tax credit= 20 Water= 240 | ----- Legal fees= 75 | Real total= 4,580 Trash= 60 | Inspections= 50 | Sewage= 24 | ------- Nominal total= 29,639 Tax savings= 4,952 (writing off closing costs, interest, property taxes ------ and tax preparation) Real total cost=24,687 Homeowners real cost minus renters real cost= amount avaliable to invest= 20,107 Properly invested= difference of 21,514 How many renters do YOU know who set aside the entire amount they are saving by not buying a house? You make the assumption that if I didn't spend all this time working around the house, I would work for someone else for ten dollars instead, and invest it. Even if you BELIEVE that, the tax savings of home ownership ought to reflect that the Time in Money is after tax money, whereas when the renter earns $4570 in his second job he would have to pay taxes. Also, every renter I know of has to spend time dealing with his landlord and often making repairs that the landlord won't make. When I rented I was still the one that had to wait for tradesmen. I have NEVER paid $240 in any year for water. I have NEVER paid $2100 in any year for utilities. When I lived in New Jersey, during the height of the energy crisis, in an oil heated house, I paid 950/yr in oil, and 400 in other utilities (excluding telephone, which I would have paid in an apartment). I did not have to pay anyone to do my taxes in the year I bought my house. The only time I did was when I was RENTING OUT two houses, and it came to about $120. THESE ARE QUIBBLES COMPARED TO MY MAIN EXCEPTION, which is that you compare a 2BR apartment to a 3BR house. You could either compare a 2BR apartment to a 2BR condo (I know of several complexes nearby where approximately identical units can either be bought or rented) or a 3BR house with a rented 3BR house. If you do this, a lot of the expenses come out the same, or even higher, in a rental property. For example, back in New Jersey where it matters, owner-occupied houses tended to be better insulated than their rental counterparts. -dick