Renting or Buying A Home Within A 5 Year Time Horizon
Scott P. Rogers
If you will only be in your next home for two (or 1, 3, 4 or 5) years -- should you buy that home? Or just rent a home instead?
Let's take a look, assuming a price point in the current market of around $175K - which is likely to be a townhouse and might be what you are considering as a first time buyer...
As becomes pretty quickly, above, it doesn't necessarily make much sense to buy if you are only going to be in your home for 1 or 2 years -- and once you get to a time horizon of 4 or more years, it almost certainly makes sense to buy a home.
For clarity, let's look at how I'm determining the cost of renting and buying this fictional house...
The Total Cost of Renting Includes...
Monthly rental rate x 12 x # years
Yep, that's it
The Total Cost of Buying Includes...
Monthly mortgage payment x 12 x # years
+ closing closing costs when buying your home (3.5%)
+ cost of selling your home (5% + $1K)
+ potential maintenance costs (1% / y)
- appreciation of your home's value (2% / y)
- potential tax benefits of interest paid (int x 40% x 25%)
Here's a visual (click for a closer look) as to how those numbers line up over a one through five year time horizon...
I should also note that it is quite possible to be "just fine" from a financial perspective if you buy and only end up being in the home for a year or two if...
- your home's value goes up much more than expected during that time frame
- you have little to no maintenance costs during the time that you own the property
- you decide to keep the property as a rental property and thus do not need to factor in the cost of selling the home
As you are thinking through whether you should buy or rent -- at a $175K price point or otherwise -- feel free to touch base with me and I can give you some feedback and advice based on your overall circumstances.
