Buy vs. Rent --- Harrisonburg Townhouse on Vine Street

There are many perspectives on whether it is better to buy or rent --- let's pick one property type, in one imaginary buy vs. rent scenario, and start with a monthly cash flow perspective . . .

The townhome pictured to the right, located at 904 Vine Street in Harrisonburg, is listed for sale with a price of $149,000. Since homes sell on average at 97% of their asking price, we'll assume that it may sell for around $144,530.

We'll also assume that one might be able to rent it for around $825 per month.

If we just consider monthly cash flow, we will discover that it takes a $17,000 down payment (plus closing costs) to keep the monthly mortgage payment in line with the projected $825 per month rental payment.

Many buyers of townhomes in this price range do not have $17,000 to put into the transaction --- some only have the closing costs ($3,000 - $4,500). Let's take that angle --- which increases the monthly mortgage cost to $922 per month, or $97 extra each month.

So why might someone consider purchasing this townhome rather than renting it? Let's assume, for a moment, that the conflicted buyer-tenant will stay in the townhome for three years. Here's the comparison:

1. The buyer pays $3,492 extra in monthly housing costs ($97 * 36 months)

2. The buyer pays down their mortgage $6,176 during the three years.

3. The buyer pays $23,366 of interest, which saves them approximately $5,841 on taxes (assuming 25% bracket).

So far, the buyer is ahead of the tenant by $8,525 by the third year.
If we then include a modest 3% per year appreciation, the buyer has gained an additional $13,402. (They don't get this until they sell).

Thus, by buying, rather than renting, the net gain comes out to be:
- $4,000 purchase closing costs
- $3,492 extra monthly housing costs
+ $6,176 principal reduction
+ $5,841 tax savings
+ $13,402 appreciation
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+ $17,927 net gain after three years

One important note --- if the buyer then decides to sell after three years, some portion of their gain will be expended in seller closing costs.