Buying Beats Renting - NEARLY Every Time
Buying beats renting
(Jeff) In this video we will be talking about our How buying a home beats renting a home in NEARLY every scenario. But also stick around towards the end to hear when buying a house doesn’t make sense…
(Jeff) Hey, it’s Jeff Chubb I am a retired investment banker turned real estate agent that has sold more then a 1,000 homes and am here with
(Sammy) and I am Sammy Illiopoulos, I am one of the top 300 loan officers in the United States and work with Guaranteed Rate.
(Jeff) Well, Sammy… The saying goes that either way you are buying a house. But one is for you, the other is for your landlord. Am I wrong?
(Sammy) No, you are not wrong. When you look at the numbers it is just astounding. Take a look at this, After 3 years of of paying $3,000 in rent… You have paid $108,000 to a landlord. In 10 years, that becomes $360,000!
(Jeff) I am going to play a little devils advocate here. When I rent, I am not paying for the property taxes or insurance.
(Sammy) Oh yes, you are! It’s all built into your rental payment. What makes it even worse… You can’t write off the property taxes when you rent like you can when you own… But I know I am getting ahead of myself as we are going to talk about the tax benefits soon.
(Jeff) That is some big money! I mean… If your rent payment is $4,000 a month, then that is nearly a half million dollars in 10 years! That hurts.
(Jeff) Sammy, talk to me a little about what someone means by having a “built in savings account each month”
(Sammy) Don’t get me wrong… It takes time. When we first start paying our mortgage, we pay more interest than principal in the beginning. But even with the first month’s mortgage payment, a portion of that payment is going towards your principal.
(Jeff) Ya, I am a nerd so I look at mine each month… Each month I pay down over a thousand dollars in principal. And I know that number will grow the longer I have my mortgage… But as of now, it’s a built in savings account of more then $12,000 per year.
(Sammy) Twelve thousand dollars is a lot of money! That is more than just a little something!
(Sammy) I think one of the most important factors that are rarely talked about is the stability of owning a home and what that means.
(Jeff) I couldn’t agree more with you on this one. I know everyone always jumps to the stability of having a locked mortgage payment, but I think about the aspect that no one can force you to move!
(Jeff) I can’t begin to count how many angry and disappointed tenants that I have had to work with because their landlord has decided to sell the house. I recently had one where the guy had been there for nearly twenty years!
(Sammy) That’s crazy, but having kids I just think about being forced to uproot my kids and how tough that would be on them.
(Jeff) Agreed. But there is also the stability of knowing what your mortgage payment is each and every single month.
(Sammy) Keep in mind Jeff that it could change a little from year to year if your property taxes go up or it could change a lot if you have an adjustable rate mortgage… But ya, you are right on that one.
(Jeff) Right. If I have a 30 year fixed mortgage, then I can enjoy the stability that no one is kicking me out and no one is increasing my principal and interest payment each month.
(Sammy) That can be so beneficial when it comes to planning for the future. Maybe it is the kids 529s or maybe it's your retirement that you are looking to save for. Knowing your expenses is vital.
(Jeff) Alright, here is my favorite… It’s the tax benefits of owning a home. This one amazes me because very few people ever think about this when they buy a house.
(Sammy) Ya, but I think that is because it’s a little complicated and people can get lost in the weeds.
(Jeff) That makes sense. Well let’s see if we can uncomplicate it… But first and I think you will see why in a couple seconds, I always say that April 15th is tax day and April 16th should be National Go Out and Hug your house day… THAT is how much owning a home can save you in taxes.
(Jeff) Sammy, what is the first tax benefit?
(Sammy) - That is the mortgage benefit where you can write off the interest that you pay on your mortgage. And that is a big one!
(Jeff) Yes it is!
(Sammy) It's important to note that the interest you pay will start decreasing year over year on your loan so 15 years in, this one may not be as big as it was on day 1. But Jeff, can you give me some hypothetical numbers?
(Jeff) Sure. Keep in mind these are all very hypothetical. Let's say you have a $450,000 mortgage at 5%. That means your principal and interest payment would be around $2,416 per month. In year 1, that means you would pay $22,349 in interest.
(Jeff) Now let's say that you made $85,000 a year. How the mortgage benefit works is that you can write off that $22,000 in interest. Essentially that means that your taxable income is now $62,651. Now lets pretend your tax bracket is 25%, then that means your new home just saved you nearly $5,600 in taxes.
(Jeff) There are a LOT of assumptions there, so I can’t stress to you enough that you should talk to your accountant in regards to how much you personally could save.
(Sammy) And if you don’t have an accountant, then we have a guy!
(Jeff) To your credit… He was actually your guy first…
(Jeff) Then there is the Property Tax exemption. Talk to me a little about this Sammy.
(Sammy) Yes. We are also able to write off our property taxes as well. So even more tax savings.
(Jeff) Again, you want to talk to your accountant about what you can write off because there are what are called SALT limits.
(Sammy) Then there is the big one. The mother of all tax benefits… The Capital Gain Exemption.
(Jeff) Yes. This is just phenomenal. If you live in a house for 2 out of 5 years, then any gain up to $250,000 for an individual and $500,000 for a married couple is capital gain tax free.
(Sammy) How does that 2 out of 5 years work?
(Jeff) It means that you have to have lived in the house for 2 out of the last 5 years. So it could be year 1 and year 5 or what happens a lot… They live there for year 1 and 2 then someone will convert the property to an income property for 2 or 2.5 years… Then they will sell so that they can realize the entire gain without having to pay the capital gains tax. In this scenario, if you have the property be an investment property for 3 years and 1 day… Then get ready to stroke a large check to Uncle Sam!
(Sammy) Speaking of gains, there is also the benefit of appreciation.
(Jeff) It’s true, the market can go up and down, but when calculated for the long term… Real Estate is just a phenomenal asset.
(Sammy) Didn’t you do a video comparing an investment in the year 2000 in real estate vs. the stock market for the 20 year period leading up to 2020?
(Jeff) Yup. The long term returns were crazy… And that even included the time period where housing got crushed in 2008. I will put a link to the video in the description if you are interested!
(Sammy) All this appreciation talk makes me think about the Rainy Day Fund benefit
(Jeff) You know Sammy, this one is often overlooked as well. I think about when COVID hit… I was so happy I had the Home Equity Line on my house. I just considered it the second rip cord on my parachute if things were to really get bad…
(Sammy) Well hopefully that is a once in a lifetime misery, but I think the more common use is if someone maybe loses their job. They can tap the equity in their house to get by while they are looking for their next opportunity.
(Jeff) I know we said we were going to talk about when not to buy a house… But first lets tackle the final benefit of being able to customize your property.
(Sammy) Yes. You want to paint a wall in your house. Go for it! You want to take down a wall to make the space more open, then go for it. You are able to make the house… your home.
(Jeff) You can’t store nuclear waste in the property… I always laugh at that one because your mortgage will very explicitly state that you can’t do this as an FYI.
(Jeff) So Sammy, when should you not buy a property?
(Sammy) That is a great question. And the answer to that is if you aren’t planning on being there for the long term.
(Sammy) As an example, maybe you are moving to Boston for a work assignment and the assignment may only be two years. Well that could be a good example as to a time when it is better to rent.
(Jeff) And why would that be?
(Sammy) Because of your closing costs in order to buy and sell the property. There is a good chance that if you were to sell 1.5 years after buying a property… That the market would not have gone up enough to recoup those closing costs.
(Jeff) That makes sense. Another reason when renting could make more sense than buying is if you are new to an area. Maybe you want to rent for 6 months or a year to get a feel of the different areas of Boston or what all the suburbs of Boston have to offer.
(Jeff) Well Sammy, I think we did it! THAT is why buying beats renting.
(Sammy) Yes. If you are thinking about making a move in Massachusetts, then be sure to reach out to this guy (pointing to Jeff). He is one of the top agents in the state and will take great care of you. I can’t begin to tell you how much experience matters and finding a quality agent will make the difference between a good experience and a miserable one.
(Jeff) And if you are buying a home in MA or really anywhere in the country, then Sammy can help you! He works for the #2 lender in the country and is one of their top 10 brokers in the company. I have worked with a lot of mortgage brokers in the past… You won’t regret reaching out to Sammy.
(Jeff) Our contact info is below, so let us know if you have any questions and until next time!