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Rent vs. Buy Analysis

(Get an idea of how much you really save when you buy a home!)

This page is in the building process. Pacific Southland is NOT a tax consulting company, and we wish to make that point clear at the outset. This rent vs. buy page is NOT a calculation, but is an approximation given to show the relative savings in buying a home vs. renting a similar property. A very large part of this demonstration requires knowing your tax bracket (percentage) as the results will vary substantially based on that factor. Call your tax professional for advice.

A Rent vs. Buy discussion is based on three specific financial "savings" when buying a home.

The first is tax savings. The government still provides a substantial tax savings for Americans in the process of buying their own home. The basic savings is in the ability "write-off" the mortgage interest paid and the property taxes on the home. We will show in the demonstration a VERY simple method for guestimating your approximate tax savings for the year. This tax savings changes constantly as the interest part of the payment becomes smaller, so for this example we will use a two year average.

The second is equity buildup. This is simply the amount of principle you pay off every month over a period of time. The portion you pay off is essentially money in a sort of savings account. If you add value to your property through improving, you are also building up equity in the property.This part of the calculation assumes the property value remains the same relative to inflation. The changes in the value caused by economic factors are addressed in the next section.

The third part is inflation/deflation. For many years, folks investing in their own home could assume some increase in value due to the rise in the economic values because of inflation over a period of time. This factor is not a tangible, calculatable number, and has in fact moved in the other direction in bad parts of the economic cycle in the early 90's, and now again in the mid 2000's. Still, it is a real factor to consider when buying vs. renting. In a downturning market, you may be better off to continue renting if you have a good rent rate, and buy at the bottom of the market. When is the bottom? Well, the first thing to look for are when people are starting to get good deals from bank owned property purchases (REO's) and as of this writing (Feb. 2008) that would be now.

Of course, when borrowing money, you are paying three to four times the amount you borrow over the 30 year loan period in total. Keep in mind that this is a relative comparison of rent vs. own. The money being "thrown away" on interest is being compared to that "thrown away" to your landlord in a rental situation, and the relative benefits of the factors involved in a purchase.

We will not provide a specific calculation here, but ask you to consider (with your financial advisor) the above factors when making these decisions. There are plenty of "Rent vs. Own" calculators on the internet, but frankly, we just don't buy a simple answer on this one. Think about your options, weigh them over a time based consideration, and make your decision.

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