1.18 Should I Buy a Home – or Rent? The Considerations
In considering whether it pays to invest in and own residential property or to rent a residence, here are some quantitative factors that one may insert into an NPV comparative analysis. Can you identify any qualitative factors?
Buying
Closing Costs include the down payment, title search and insurance fees, legal fees, and others.
Recurring Costs include mortgage payments (both principal and interest), condo or coop common charges including maintenance, property taxes and homeowner’s insurance. Property Taxes are value-based. Additionally, the interest portion on the mortgage held by the coop or condo association is tax deductible; a mortgage on the building and paid by the coop or condo association is included, pro rata, in the common charges.
Opportunity Costs indicate what you might have made had you invested the down-payment and the closing costs in something else instead.
Net Sale proceeds equals cash from the sale of your home less closing costs, including the broker’s commission, less the remaining balance on the mortgage, less any capital gains tax paid on profits exceeding the capital gains exclusion.
Renting
Initial Costs include the security deposit (usually equivalent to one- or two-months’ rent) and, if applicable, a broker’s fee.
Recurring Costs include the monthly rent and renter’s insurance.
Opportunity Costs represent the alternative return one might have earned had s/he not had to pay initial costs and recurring costs.
Net Sale Proceeds include the repayment of the rental security deposit, which is returned at the end of the rental period or lease.