Buying Versus Renting

This is one of the most commonly asked questions I hear, so I am going to cover what I have found to be the best way to determine what is right for you by breaking it down into categories.

My area has a lot of military buyers so I will cover them first with questions they should ask themselves to determine if buying is right for them:

1. How long will I be in the area?
   If your answer is a 3 – 4 year period then Yes, and I will cover why after we ask our selves all the questions.
2. Will I be deploying a lot for extended periods of time and relocating my family closer to loved ones in a different state or extended distance from my home?
   If you will be, then no, buying may not be right for you. Upkeep and maintenance will become a problem, If you decide to buy and rent it while you are deployed and your family is out of state most tenants will want a yearly lease and it could present problems if you return early. Your home will be rented and your family will be ready to return also.
3. How is the area appreciating?
   This is a biggie remember most Military buyers use a VA loan that means they pay a funding fee ( 2.2 % of loan amount for the 1st time you use your entitlement, 3.3 % of loan amount every time after the 1st.) which usually gets tacked on top of their loan amount. A good way to look at it is a $100,000.00 home purchase price will result in a loan amount of $102,200.00 loan amount. You are able to pay the funding fee up front if you want. ***Another tip if you have prior military service and receive 10% or more in disability from the VA you do not have to pay any funding fee*** All of this can result in a negative equity position making it harder to resell and make a profit when you leave or transfer.

These are the main questions to ask yourself and family. If the answers are favorable to buying then please read on for some of the reasons to buy.

In our area you can usually buy with less money out of your pocket than you can rent. I will break this down for you. I am going to use the $100,000.00 home as an example again. A home with $100k of value for 3 bedrooms, 2 baths, double or single car garage in an area with good schools and close to amenities usually translates to a rental amount of $850-925 a month. If you have some small dings on your credit they can increase your security deposit to two months, to where if it is minor issues you can still buy using your VA entitlement.

COST TO RENT:
CREDIT CHECK AND APPLICATION $40.00
SECURITY DEPOSIT $900.00
FIRST MONTHS RENT $900.00
PET DEPOSIT $200.00
RENTERS INSURANCE $25.00

Total out of pocket is $2065.00 and you do not get any deductions for your taxes (however, the landlord can). When you decide to leave you will have received nothing in return (tax deductions, appreciation). The only thing you may get back is your security deposit.

Now I will cover the cost of buying the same home. I will break the monthly payment down here first on $100k purchase price based on an interest rate of 6%: Principal and interest $612.74, Taxes $120.00, Insurance $50.00. Total monthly payment $782.74. You have saved $117.26 a month already on comparable homes.

COST TO BUY:
CREDIT CHECK AND APPLICATION FEE PART OF CLOSING
SECURITY DEPOSIT NONE
BUYERS SHARE OF CLOSING COST $1200

You will only need your earnest money up front (typically 1% of purchase price). Depending on what part of the month you close it maybe up to 6 weeks before 1st payment is due.

Now lets cover what you get when you leave based on a modest amount of appreciation (3% a year) and your yearly tax deduction. Average of $5976.90 a year additional tax deduction for interest paid (based on owning for 4 years). Your remaining loan balance on the home will be $96,696.05. Your home will be worth $112,550.00

Now I am going to cover your proceeds from the sale based on realtor commissions and closing costs:

COMMISSIONS $6753.00
(*remember a good realtor will price your home correctly, appreciation could be higher and save you money in the transaction)
CLOSING COST $3375.00
TOTAL COST $10,128

You still pocket $5725.95 and you saved $5628.48 between rental amount monthly and your mortgage payment. Also, don’t forget to add back in savings every year from the additional tax deductions.

Rent vs. Buy Calculator
Use this calculator to determine if renting or buying it best for you.