Renting vs Buying

The decision to keep renting versus buying can be a complicated one. There are of course financial considerations, and also some qualitative factors. Here are some items to consider:

- Are you at a point in your life where your living situation will be stable for the next 2-5 years? If you're expecting to change jobs, transfer to another region, get married or expand your family, make sure you consider where you will be in 2+ years. It will generally take AT LEAST that long to recoup just your purchasing and selling costs (assuming no property appreciation). The market will always have its ups and downs, but the key is to not put yourself in a situation where you MUST sell in a down market.

- Do you have a detailed monthly budget and have you tracked your spending against that budget for several months? Is there room in your budget for not only the mortgage payment, but also property taxes, insurance, and condo/HOA fees? Make sure you you considered the tax implications--For most people, a housing payment will be much higher than the monthly rent, but a good chunk of that payment is tax deductible, which is essentially a government subsidy to buy. Find your previous year's tax returns, and calculate your marginal rate. Then use that information in a rent versus buy calculator (see a link to my favorite one below) and calculate your "breakeven point" for renting versus buying.

- Are you ready for the responsibility of maintaining your own property? No more calling the landlord when something breaks, or floods, or falls off. Make sure you have some cushion in your budget for these items, too! You'll also be responsible for the yardwork, the upkeep, and protecting your investment.

Before we jump into the link for the calculator, let's talk about the assumptions you'll need to enter into the tool.

Check out the "Advanced Settings," especially on Buying, where you can enter such things as condo fees (count on at least $250-300) and costs of buying home (about 3% for closing costs is a good rule-of-thumb) and selling (count on 7-10%), maintenance costs, It even lets you enter the return on alternate investments and inflation rate, and the capital gains exclusion (see "Tax Benefits of Home Ownership" post at my blog at http://katiewethman.blogspot.com). This is simply the most thorough calculator I've seen.

The only downside to this particular calculator is that it doesn't allow for different financing scenarios--say an ARM loan or interest only loan. (No, interest-only loans are not instruments of the devil; in fact for some borrowers it is a fantastic option. They've been abused quite a bit in the past few years in this area, and now there's an unreasonable backlash against the product.) Nonetheless, it's an excellent tool overall and includes many "hidden" costs of homeownership.

Of course, the breakeven point always depends on your assumptions, so what are some "reasonable" ones? Reasonableness is in the eye of the beholder, but a conservative estimate of property taxes in this area is 1%. Long-term appreciation rate is of course a huge driver; the long term average, according to the GMU study I've reference in posts at my blog, is 7%, though of course 2006 was much less than that. GMU estimated 2.2% appreciation in 2006, currently is predicting somewhere between 0-5% in 2007, and expects a return to the long term average of 7% by 2008-09.

I've also included below the link to the NY Times article that accompanies the calculator. Interestingly, the article is an argument to rent over buying, which is the best option for lots of people. These types of articles paint the market with a broad brush, by necessity--they have a national audience. But if there's one thing everyone knows about real estate, it's location, location, location. All real estate, like politics, is local. Don't take someone's word for it that buying is the right answer for you--use your own assumptions and tools, like this one. But in my experience in this area, with rents and income levels being what they are in DC, combined with the long-term market view (if one were to believe the historical data and housing shortage projections, anyway), the numbers almost always add up to buying.

I'm a licensed REALTOR in VA, DC, and MD, affiliated with Keller Williams Realty.

6820 Elm Street
Suite 100
McLean, VA 22101
(703) 636-7300
katie@katiewethman.com