Rent- vs- Buy

Still renting? Get smart!
A college-educated single male 30-something with his own sole proprietor business, who has always been a renter, recently told me: "I don't think I really want to buy a house and, anyway, I can't afford to." He would like to have more financial independence but has no idea how to get it. Although his business regularly brings him in contact with real estate agents, some of whom he considers close friends, no one, apparently, had presented him with the wealth-building possibilities of buying a home...or the specifics of how to get from here to there and come out ahead.
Our hard-working renter, Joe, pays $1,200 a month in rent, which he easily covers with his income. Being single, and without the expense of responsibility for others, he drives a decent car, travels a bit, and has saved $60,000 cash, plus taken the maximum Roth IRA deduction every year, so he's starting to get his retirement savings going. His credit is very good. So why is he still renting? Because...
1. He's not sure he's going to stay here (although he's been here, renting, for 6 years);
2. Property values in this market have dramatically increased in the past 5 years and he's afraid he's missed the window of opportunity (but might not that indicate that prices will keep going up?);
3. He doesn't want to spend a lot more than he's paying in rent;
4. He doesn't know how he can afford a house because the median house price in our market is around $207,000.
5. He does not understand that TIME is on his side. The sooner you begin to invest in real estate, the more wealth you will accumulate over time. In 20 years from now, Joe will be in his early 50s. With the seemingly endless population growth, there is no reason to think demand for housing will decrease, especially in desirable places like Charleston, nor that values will do anything but rise.
What I suggested is this: Buy a house NOW (they keep going up in value). Since his business is doing well, he will probably continue to be here for at least a few more years. If he decides to move, he can 1. keep the property and rent the house and should break even on the mortgage and continue to take advantage of appreciation; or 2. sell the property when he moves and keep whatever profits tax free,(if he has lived in it for over 2 years) up to $250,000 profit per single person ($500,000 per couple), or 3. sell the property at a later date (when it is no longer his primary residence) as an investment and exchange the profit for another investment property in what is called a 1031 Exchange.
The benefits, besides the emotional satisfaction and freedom of owning one's own home, are many:
1. You are SAVING money into your own account, not throwing away money on rent. Historically, the payments made on a property, over 3 years or more, are typically recouped at closing, making your mortgage payments a sort of savings account. This does not include the wild appreciation of the past few years seen in certain markets.
2. Tax deduction of all mortgage interest payments. To be clear, this is not a straight deduction off the top of your income, but rather an itemized deduction. For example, if your mortgage interest payments are $1,500 per month, or $18,000 per year, you can deduct the $18,000 from your income. But be aware that if your standard deduction is, say, $9,000, you pick up an additional $9,000 and not an additional $18,000. This is important to factor, but usually, it's a significant increase in deductions, especially if you do not have a lot of other deductions. Talk to your tax advisor or get out the 1040 package and figure it out for yourself.
3. You are building EQUITY, NET WORTH & CREDIT worthiness.
4. You can take advantage of TAX FREE PROFITS.
5. You are starting on the road to long-term security and wealth-building.
**NOTE: it is possible to obtain an "interest only loan." This is not an adjustable-rate-mortgage (ARM) but, rather, a 30-year fixed wherein you can choose to pay the interest only. Since little of a mortgage payment is allotted to principle in the first 15 years of a 30-year mortgage, the monthly savings of the principle can make the difference between comfortably affording a property and being stretched too thin. While doing this does not pay down your principle, if your plan is to hold it for 2-5 years and your market is appreciating at least as much as your interest rate, and/or you improve the property over time, this could be a viable option. But as, always, careful analysis of various options and scenarios is advised.
For more information on real estate, and how you can qualify for and profit from home ownership or residential investment, please fell free to contact me via email at
erika@gaycharlestonrealestate.com or eperry@prucar.com