fulford@altos.dec.com.UUCP (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:
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General terms- these are national averages from 1970-1980 and are not
to be used as a comparison with your own situation.
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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
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Renters world
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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
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Cost of living in the financed home
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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!)
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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
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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.)jld@ulysses.UUCP (Jeff David) (10/10/86)
> The following analysis was obtained the Consumer Reports magazine, May 81. > This analysis is so incredibly flawed that I cannot help but to respond: The main points: 1) "Time in money" is treated as a cash outlay evenwhen it is not. Then, even if it is not, it is added back as a cash expense that could be invested by a renter! You cannot have it both ways. 2) The tax calculation is also flawed. For the person described, owning a house allows ALL itemized deductions to be taken as opposed to the standard deduction. The proper tax saving calculation is (All Itemized Deductions - Standard Deduction) * Marginal Tax Rate, not (House Deductions - Std Deduction) * MTR. 3) Tax preparers are totally unnecessary for schedule A. 4) The utility rates (especially water) are suspiciously high. I am paying $10/mo for water in 1986 in New Jersey where water is supposedly a scarce commodity. 5) The comparison of the rental property is apples and oranges. At the very least, a 3 bedroom apartment should be used for comparison. The proper way to proceed would be to assume you are renting a similar house. 6) The assumption is made that the renter has the discipline to invest the saved difference. In reality the "savings" is more often spent than saved. The same argument is made when deciding whether to buy a car with cash. If you invest the payment, you come out ahead. 9 times out of ten that wouldn't happen. If I have the time I will do an alternative analysis. But you can see that if you eliminate the "time in money" and do the proper tax calculation, the homeowner comes out way ahead. Jeff David P.S. Under the new tax law, however, it is not so clear.