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Is Renting a Better Idea for You than Owning?

I just happened to see an article on Yahoo.com on the merits of renting instead of buying.  It’s written by someone from usnews.com and quotes an economist from Fidelity Research and a director of realty studies from an university.

They mention that there are periods where the housing market dominates but give another 18 months to this correction and it may not be true.  Some homeowners got twice what they paid for their homes but boom town Phoenix only saw a median 4.6% appreciation since 1981.  It is said that as an alternative the down payment could be invested in a mutual fund earning 8%.

Based on what are faulty premises, I see the following problems with the article:

Just stating a median 4.6% appreciation rate understates the typical return to a homeowner for the following reason:  The appreciation is calculated on the home’s total value but you only invested a portion of that up front.  Let’s be generous and say 20% although 10% is more typical of first time buyers.  Your actual cash-on-cash return is 23%.  And with only 10% down it is 46%.  That’s the power of leverage.  Not too shabby!

The fellow from Fidelity has a vested interest in a potential buyer putting their down payment in their mutual funds.  And really, with the equity market the way it’s been since 2000 who of us has actually gotten an average of 8%.  And more importantly, has that return kept up with inflation?

If you know you will be moving, that your stay will be short-lived then it may make sense to rent with the costs of coming and going.  Otherwise, with Uncle Sam subsidizing your expenses and the return from “leverage” it could turn out to be a great deal especially if you take advantage of some of “sales” that are going on now.  We have to live somewhere and as the great humorist Mark Twain quipped “buy land, they’re not making it anymore.”

 

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