I’m always pumping out spreadsheets analyzing the best way to use your money. We’ve been living in our house for almost 2 years and Susan is ready to trade up. It’s common knowledge that you should rent if you’re going to live somewhere for less than 5 years, own if you’ll be there 5 years or longer. Is common knowledge correct?
Let’s take a look at how the numbers actually break down:
Mortgage = 2,300 / month
Improvements / maintenance = 200 / month
Cost to rent equivalent home = 1,900
$80k down payment = $466 / mo opportunity cost (assuming a 7% return if invested that cash)
Mortgage interest tax deduction = $650 / month
2,300 + 200 + 466 – 650 = 2,300
Equity = $15,000 over 21 months = 1.6% equity growth or $714 / month
$400 difference between rent and own – $714 equity growth = $314 / mo we come out ahead.
Fees to buy / sell = $30k (3% of purchase price and 3% if you sell yourself, which we plan to do)
$30k / $314 = 95 months or 7.9 years.
We must hold the house for 7.9 years to reach break even, unless equity growth increases. Wow, not the best situation. Unfortunately equity growth is typically around 3% (house prices should mirror inflation). If equity were at 3% then you can figure 4 years would roughly be the break even point. I’d say common knowledge wins this argument.
We are 500 yards away from the metro station that is being built in Reston, so I believe we will catch back up with the standard equity growth after it’s completed. Sadly, for Susan that means waiting another 2-3 years, and alas, living here for the standard 5 years.
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