Originally Posted by trick fall
I'm also surprised that no one has mentioned the tax advantages to owning.
Exercise: two equivalent townhouses in a "chi-chi" part of Silicon Valley. The ownership is five years. I assume a 5% annual real estate growth, which at this point may not be realistic. Then again, the 5% apr mortgage isn't realistic either. So this is a bull market study.
#1 Rents for $3000/month
#2 Sells for $1M (20/80 mortgage, 30 year, roughly 5%)
#1 sunk cost over 5 years, assuming 5% annual rent hikes = $199K
#2 sunk cost over 5 years is more difficult to determine. We must factor in:
- mortgage interest
- property tax
- upkeep (easy for townhouse, add $300/month with %5 annual increase
- tax writeoffs (interest paid, some property tax)
- appreciation and sale price
The plan here is to solve for the amount of write-off needed to make option 1 and 2 have the same sunk cost.
Mortgage per month is roughly $5600 (interest per month is roughly $3200)
5 years of mortgage payments = $336000
5 years of Property tax is roughly = $55000
5 years of assoc fees are = $19900
5 years total cost = $411K
appreciation = $276K
after agent fees = $212K#2 total sunk cost = $199K
So, in this bull market study, the tax advantage is the only thing that makes ownership more desirable than renting. However, renters have better mobility (if that's an issue) and, more importantly, the present market has higher rates and much less potential for appreciation, especially as the boomers start to pass.
The other question is: what if this were five years ago (actually quite realistic) but you had rented, and instead put the $200K into google or Apple? after capital gains taxation, you would come out $1.9M better off than the buyer of the unit next door!