Here's the latest installment of Bates By the Numbers, a weekly feature by Boston real estate agent David Bates that drills down into the Hub's housing market to uncover those trends you would not otherwise see.
My client was trying to decide whether he should keep on renting his $1,775-a-month one-bedroom apartment or buy, for $296,000, a brand-new two-bedroom, two-bathroom condominium with two parking spaces. If he continued to rent, he said he might buy a car.
I wanted to know in which scenario, renting or owning, the client saved more money, so I decided to do some rent vs. own numbers. In each scenario, I called all the dollars he gave to someone else "wasted."
It was easy to figure out the "wasted" cost of the rental: $1,775 a month. All the rental dollars went to someone else.
In the condominium-purchase scenario, however, the buyer had several costs and what portion was wasted and what portion eventually worked its way back to him had to be figured. The first such payment was a mortgage payment, which, based on 20 percent down, amounted to $1,057 a month ($238K at 3.45 percent over 30 years). This $1,057 monthly payment was split between principal ($376 in the first month and growing each month thereafter) and interest ($681 in the first month and declining each month thereafter).
I decided that since the buyer would eventually get the principal portion of the payment back in the form of equity, the principal portion couldn't be considered "wasted." So even though the buyer was paying out $1,057 a month, he was getting $376 back each time, meaning at most, only $681 a month ($1,057 - $376 = $681) could be considered wasted.
The $681-a-month payment, which on the surface appeared wasted, was the interest the bank would charge the buyer on the loan. Yet, since mortgage interest is tax-deductible, a portion of the $681 would be coming back to the buyer in the form of savings on his taxes. The money he saved on taxes could not be considered wasted, so assuming the buyer was in a 30 percent tax bracket, he would get 30 percent of the $681 back. As a result of savings on his taxes, the buyer's wasted dollars would go down to $476 a month ($681 - $681 x .30 = $476).
As well, in addition to paying principal and interest, the buyer had to pay real estate taxes. The real estate taxes for the condo were $400 a month, but because real estate taxes are also tax deductible, 30 percent of the $400-a-month payment would be coming back to the buyer. As a result only $280 a month of the real estate tax payment could be considered wasted ($400 - $400 x .30 = $280).
The monthly condo fee the buyer had to pay was $271, all of them wasted dollars.
In summary, the wasted dollars associated for buying were:
R. E. taxes: $280
Condo fee: $271
Total wasted: $1,027
Admittedly, on the rent side, I've left out a bunch of costs that were not monthly costs—including closing costs and selling costs, as well as the opportunity costs associated with money the buyer could have made by investing his down payment in something other than this purchase. At the same time, however, on the buy side, I've left out a potential huge revenue payoff for the buyer: the projected real estate appreciation.
Based solely on the monthly dollars wasted, however, clearly the buyer could own a bigger and better home for nearly $800 less a month than renting. In other words, if the buyer bought the condo, he could get a car with the savings and still be paying less than renting.
Despite this rational analysis of dollars wasted, my buyer signed another rental lease. Did he make the right decision? What do you think? Let me know.
· Our Bates By the Numbers archive [Curbed Boston]