Beginning Real Estate Investing? Your First Decision Is a No Brainer – Should I Buy Or Rent?

Your first real estate decision is a no brainer! Truth is, you’ll live for free by buying instead of renting. Just the facts please. OK, here’s the facts and figures:

If you buy a home and live in it for 5 years you will have lived for free. Your mortgage payments, related closing costs, insurance and property taxes will be returned to you through tax savings and profits after you sell the property. Here’s how it works: (to make it easy we’ll use a $100,000 property even though this figure might seem very low for a home where you live, there are still many places where this is a realistic figure)

Price $100,000
Down Payment – 5,000

Mortgage $95,000
Interest Rate x 10%

1st Year Interest $9.500
Property Tax +1,000

1st Year Expenses $10,500
Income Tax Bracket x 33%

1st Year Tax Savings $3,465
Appreciation @6% + $6,000

Tax Savings and Appreciation $9,465

Your Interest for the first year was $9,500 and your property tax bill was $1,000, which together total $10,500, but your investment return from tax savings and appreciation was $9,465. If instead you were paying $600 a month for rent you would lose $7,200 a year or $36,000 in 5 years because renters don’t get any tax deductions nor can they take advantage on any of the property appreciation. These benefits go to the owner.

You as owner would have paid $760 a month for a total of $45,000 in mortgage payments during those 5 years. Add to that another $5,000 for property tax and your total would be $50,600 or $10,120 a year. These numbers are higher than the renter paid… but wait!

As the owner you would have saved an additional $3,465 a year in tax savings from tax deductible interest and property taxes. Also, your appreciation on the property is a conservative $6,000 (@6%) many cities have higher appreciation rates.

So you spent $10,120 a year and got back $9,465 in cash and equity. Realistically you only spent $655 a year or $3,275 to live in a place for 5 years.

But don’t forget, part of your mortgage payment went toward paying off about $4,000 of your principle of that 5 year period, which is more than the $3,275 you spent out of your pocket.

Would you rather be the owner of that home or the renter?

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