Why rent when you can buy?
Renters get into the homeownership game for many reasons, whether to fulfill the almost genetic American Dream ideal, simply to own the space they occupy or to place a bet on the future of real estate. For real estate agents, one convincing tool readily available is to share the concrete financial benefits of homeownership with those who presently rent their shelter.
Real homeownership numbers talk more loudly than broad assumptions and pro forma generalizations about:
- tax savings from interest deductions;
- equity buildup through mortgage amortization;
- an inflationary hedge; and
- appreciation profits.
And how do forward-thinking agents provide this higher level of concrete data? Get functional. Act smart and show potential homebuyers the actual dollars and cents they accumulate through homeownership — the same dollars and cents you will help them put in their pockets. Thus, persuasively illustrate the benefits of buying by factual, written evidence.
Here, we outline a straightforward way for you to efficiently compare monthly costs of owning versus renting by use of an interactive form. This includes a presentation of the dollar mortgage deductions and tax savings attained based on your buyer’s home price, down payment and tax bracket. All critical data contained in the form is presented as monthly and annual figures that your buyers will quickly comprehend.
Monthly costs and savings
To start, prepare the Buy-Versus-Rent After-Tax Analysis published by RPI (Realty Publications, Inc.). With it you compare the future homebuyer’s current costs of renting against likely homeownership costs (and savings). [See Figure 1, pre-filled RPI Form 320-4]
In application, you use the Buy-Versus-Rent form in one of two ways:
- As a hypothetical situation when your potential buyer currently rents and does not have a clear vision about owning a home. In this case, review with them the costs of homeownership section to show the estimated operating and ownership costs for a home similar to the one they now rent. [See Figure 1, pre-filled RPI Form 320-4 §2]
This application of the form is best suited for first-time buyers who are on the fence about graduating into ownership, but are willing to start the process of looking for a property.
- Use the form to summarize a particular home your prospective buyer actually envisions buying. Then, use the price the homebuyer intends to pay for the property and the interest rate (plus the rate of any mortgage default insurance premiums (MIPs/PMIs)) they will pay on a mortgage. The actual operating costs for a home under consideration are readily available from the seller, and if they are not willing to cooperate, an estimate will do.
This application of the form is best suited for buyers who have already selected a property or have a specific type of property in mind.
As the future homebuyer will see in the analysis, the biggest savings from homeownership come initially from annual tax savings – a direct government subsidy to encourage homeownership and mortgages. Over time, equity buildup and growth predominate to develop long-term wealth.
This financial knowledge allows the homebuyer to wrap their head around the idea that even if their total mortgage payment will be higher than their current rental payment, they will likely save money by owning. This savings concept needs to be illustrated with dollars so buyers fully grasp this somewhat unintuitive fact — the tax-subsidy produces the savings.
Finally, the form concludes with a total financial benefit analysis and a summary of wealth accumulation over ten years of ownership. Thus, the buyer is left with a long-term perspective which exhibits all the financial benefits of owning versus renting. [See Figure 1, pre-filled RPI Form 320-4 Summary Section]
Using the form
A pre-filled copy of Form 320-4 which provides a sample scenario is provided below. In the example, the future homebuyer pays monthly:
- $2,500 in rent;
- $300 in utilities; and
- $14.58 in renter’s insurance.
The home they are interested in purchasing is $500,000 and they have been approved for a fixed rate mortgage (FRM) at 4.5%. Their down payment is $25,000, or 5% of the purchase price. Therefore, they need to purchase MIP/PMI, which is also included in the sample situation.
Plugging in the relevant information into the form (including the property tax rate of 1.2% and the estimated costs of utilities) produces the comparison of the cost of renting versus owning.
The calculations assume a 3.5% annual gain in property value (an historical average) which will oscillate above or below each year. The calculations further assume the homebuyer will own the home for ten years before selling.
The initial comparison is based on out-of-pocket cash expenditures of renting and owning. It shows that owning costs $5,333 more initial cash expenditures each year than renting. In contrast, when tax savings are reduced from out-of-pocket costs, the homebuyer immediately goes from red to green, saving a total of $3,395 in the first few years. The tax savings decrease over time as principal is paid down, reducing interest deductions, but the cash savings after taxes over ten years exceeds $30,000.
To calculate the costs and savings of your client’s own potential home purchase, all you need to gather and enter is information about the:
- purchase price;
- property tax rate;
- mortgage information; and
- the homebuyer’s current housing costs for comparison.
Armed with this data, and the form will do the math for you.