# With Real Estate Prices Sinking, Should You Lease or Buy?

As housing prices have dropped significantly over the past two years, it may be time to reassess your living situation.  Since there are many different factors to consider when making a lease or buy decision, I’ll just give you an example (mine) and the formula to help you make the decision for yourself.  Then you can plug in your own information and decide for yourself. The following factors are the main influence on a purchase decision for your personal residence.

• The price of a home in your area
• Mortgage interest rates in your area
• Income tax benefits of home ownership
• The extent to which home prices may increase or decrease over time
• The period of time you expect to live in the house
• Real estate taxes in your area
• Homeowner’s insurance

The major costs associated with leasing are

• Annual rent
• Renter’s insurance
• Any damage incurred during the rental period

Let’s take a look at the following breakdown.  Section 1 helps you tally the cost of renting.  My projected costs for my personal situation are filled in.  Section 2 is the cost of buying.  I used .8% of my hypothetical new home value to estimate my yearly maintenance costs.  Section 3 lists the incentives you gain by purchasing a home and should be subtracted from section 2’s total.

The first incentive is the principal that is paid off from each mortgage payment.  This, in effect, is a savings account since you increase your home’s equity.  To find out how much principal you will pay, go online and find an amortization schedule calculator.  I went to the HSH Associates Financial Publishers site http://www.hsh.com/calc-amort.html. They will ask you to enter principal loan balance, interest rate and loan years.  Make sure you select “yes” to “show full table”.  I just used the first year’s data.  Add up each month’s payment and put it in Section 3A.  Use the same calculator to get your interest payments.  Multiply those by your tax rate (\$19,266*.28) = \$5,394.  Consider your state deduction as well.  In my case it does not apply so I will leave it blank.  Next, take your property taxes and multiply them by your tax rate to get the final deduction. Lastly, we take the Total Costs (Section 2F) minus Total Deductions (Section 3D).

1.   Cost of Renting

1. Annual rental costs                                                                        \$14,400
2. Renter’s insurance/Association fees                                              \$  6,000
3. C. Total annual cost of Renting                                                   \$20,400

2.   Cost of Buying

A.  Annual Mortgage payments                                                                  \$24,000

B.  Property Taxes                                                                                     \$ 3,000

C.  Homeowner’s insurance                                                                        \$ 4,500

D.  Maintenance expense                                                                           \$ 3,200

E.  Closing Costs                                                                                      \$12,000

F.  Total Costs                                                                                         \$46,700

3.   Less Incentives: ( If itemize deductions)

A. Principal reduction in loan balance                                                          \$ 5,762

B. Tax savings due to interest deductions                                                    \$ 5,394

C. Tax savings due to property tax deductions                                             \$    840

D. Total deductions                                                                                 \$11,996

1. Annual after tax cost of home ownership                                  \$34,704
2. Estimated annual appreciation in home value                           \$12,000
3. Total Cost of buying:                                                                   \$22,704

If the total cost of buying is more then the cost of renting then we continue to rent that condominium on the beach instead of buying it.  Looks like that’s what I’ll be doing for the immediate future.  However, the kicker in all of this is how much do we expect property values to rise (I chose + 3% a year… not compounded for simplicity).  That will be the real determining factor.  We also know that if values drop this calculation can get ugly quick.  You can play around with the numbers and find the breakeven point.  If the necessary increase in property value is reasonable for breakeven, then you should consider buying.  After all it is an investment.  These numbers will change on a yearly basis so the longer you plan to live there the better off you are buying the home.  Obviously these calculations are not the holy grail, but they can help make the decision easier.

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