OK, let's refine the rent vs. buy numbers and play it out over a 5 year time horizon. Starting again from $4250/mo. buy vs. $2450/mo. rent. Over five years, that gives us a base number of $255,000 buy vs. $147,000 rent.
Buyer Subtractions: The tax benefit on a $480k mortgage is around $10,000 per year or $50,000 for 5 yrs. ($30k in mortgage interest deduction, 33% tax bracket). Add another $1400 in property tax deduction, or $7000 over 5 years ($4200 property tax bill; 33% tax bracket).
Buyer Additions: While the mortgage may be fixed, property taxes rise about 7% every other year or around $3000 additional over 5 years.
Renter Subtractions: The renter benefits from not having to put down the $120,000 down payment. At 7% compounded annually over five years, that's a benefit of around $48,000.
Renter Additions: Rent raises could take a significant bite out of the renter, especiallly now since it looks like a landlord's market at this time. I'd estimate a fairly aggressive increase of $125/mo. on an annual basis (roughly 5%). That comes out to additional rent of 1500 in year 2, 3000 in year 3, 4500 in year 4, and 6000 in year 5, for a grand total of $15,000.
Based on these numbers, I get a grand total cost over five years of $201,000 Buy vs. $114,000 Rent. Did I do the math right?
Reimposing that on our $600,000 condo, the buyer must net $87,000 upon sale of the condo, to break even. At the time of sale, the owner will have to pay let's say 5% in REALTOR fees, $25k in deferred maintenance, and $15k in transfer taxes, fees, and lawyer. So to net $87k, the owner has to sell for around $765,000 five years from now to break even with the renter. That's a ballpark CAGR of around 6.5% per year. On DC real estate, not wildly unrealistic, but not a sure thing by any means. Did I miss anything? |
