Buy or Rent?
Written by Alex Nkrumah
Hopefully this article will kindle an interest in you to research further for the whole truth about home ownership and enable you to take the action necessary to put you in a better financial position. For those already knowledgeable in this topic it may be the impetus you are waiting for to start the process for results.
Due to some constraints we have limited the scope of this article but you are always welcome to contact us if you have any renting or buying questions that have not been addressed in this article. Similarly if you need a more detailed explanation of any issue discussed kindly contact us.
The American dream of owning one’s home can be realized with helpful information and the resources to make the dream come true. This article is for everyone in New York including would-be first time home buyers, renters and even those who currently own homes who want to take action as in the illustration given below. I suggest you contact your realtor for the statistical information for the local area you are looking at for actual market data to help you in your decision making process. If you don’t have a realtor you may utilize our database free of charge by contacting us to send you data for your market.
Generally you want to buy when the prices are low and sell when prices are high to maximize your profit. The market at any point in time may be trending up or down and there may be different markets in different towns operation at the same time within the country. This is why you need real market data to know what is really going on in the area you are interested in. Many people are comfortable with owning “the roof over their heads” i.e., their home, without the need to move around with the market. This is fine as this is what makes them happy. Others want to do more to increase their down payment position from say three and a half percent as in the case of an FHA(Federal Housing Administration) minimum owner’s investment for a home purchase loan, to 20 percent, which removes the Private Mortgage Insurance premium liability from the monthly payment obligations on a Conventional mortgage loan.
In the latter case they may sell their home when the market is great and re-invest their profit in another home with a much higher down payment. Remember that home purchase loans are cheaper than Cash Out refinance loans and have much wider LTVs (Loan To Value ratios). Another reason for selling is to get the most cash out where a refinance is not feasible and to repurchase at a lower finance cost than a refinanced mortgage. In the illustration below the family sold for some good financial reasons which also made them happy. Depending on what your interests are, a home ownership gives you many ways to profit from it besides being a “roof over your head”.
Remember that as a seller you benefit most when it is a buyers’ market, i.e., more buyers in the market than sellers. When the market depresses into a recession it is already too late for the seller. It could be another eight to ten years or more to see another housing boom. As a home buyer will you wait for the market to go down before buying (for the next recession)? And what if houses in your target market actually got more expensive?
1) Renting can be on a month-to-month lease basis. This is great if you are staying for a
short period and you are not obligated to continue a yearly lease for the months you do not need.
2) Monthly rent payments used to be less than mortgage payments for the same number
of bedrooms in some neighborhoods in some cases although the purchased home may have more space or total number of rooms than the rental. Lately, in certain markets, the rents have risen above some mortgages for single family and two family unit rentals. However, some owners may still charge less for one of many reasons.
3) Tax benefits for business use are available whether or not you own property.
1) Apart from tax benefits for business use, mortgage interest, property taxes, mortgage
insurance premium and points paid are tax deductible expenses generally.
2) On selling your home after two years of ownership you get $250,000 Capital Gains tax
exclusion if your tax filing status is Single or $500,000 if status is Married Filing Jointly.
3) Due to appreciation in property values over time due to high buyer markets it is highly possible to make huge profits.
The figures in the illustration below are actual figures from the purchase and sale of my client’s three-bedroom house in Queens, NY, which he permitted me to use. The property was purchased in March 2016 for $369,000. The down payment and closing costs at time of purchase totaled $22,915.
This investment made him $110,000 net realized cash in 34 months of home ownership in 34 months. His yearly cash profit was $38,823.53 per year
( $110,000 divided by 34 months times 12 months in a year) or 169% profit for 3 years.
He purchased in an upward market and did not wait for market values to drop before buying.
i)He does not pay capital gains tax on profit because the gain is below the $500,000 capital gains tax exclusion due to his tax filing status.
ii)He got tax deductions for mortgage interest paid, property taxes, points paid, mortgage insurance premium
iii) Can now invest 20 percent down payment in his next home purchase. This is an attractive offer for any seller and gives him leverage in bargaining power of a better price on the house than any other offers with just three and a half per cent or five percent down payment.
When you rent, your landlord is thankful for your rent payments because he or she depends on your payments to meet his or her property mortgage, tax and insurance obligations. He gets many tax benefits too. You can keep these great benefits for yourself instead of giving them away. For more information contact us.