Rent Vs. Own Analysis

Two friends, Joe Renter and Bobby Homeowner both have $7,000 in their savings account, let’s see what happens when one buys and the other rents their home:

Joe Renter has $7,000 in savings, earning 2% interest. He is paying $1,000 in rent per month.

Joe's Monthly payment: $1,000

Bobby Homeowner uses his $7,000 for a down payment on a $200,000 home, using an FHA loan at a rate of 5.0% 30 year fixed.

Bobby's Monthly payment: $1,336, including taxes, insurance and mortgage insurance. Of this payment $237 is going towards paying down the loan, and since Joe is in the 25% tax bracket, he has monthly tax benefits of $237.

After 5 Years

Joe Renter has paid $60,000 in rent to his landlord. He has not taken advantage of any appreciation, nor tax benefits. He does have $7,736 in his savings account.

Bobby Homeowner now has a home that is worth $231,000 (assuming a 3% appreciation rate), and his loan balance is down to $181,000. Therefore Bobby has $50,000 of equity in the home. He has saved about $13,700 in taxes over the 5 years, because of the tax benefits of owning a home, which he has deposited into his savings account.

Joe’s net worth is $7,736, while Bobby’s net worth is $63,700 (equity + savings)

After 10 Years

Joe Renter has paid $120,000 in rent to his landlord. He has not taken advantage of any appreciation, nor tax benefits. He does have $8,548 in his savings account.

Bobby Homeowner now has a home that is worth $268,000 (assuming a 3% appreciation rate), and his loan balance is down to $160,000. Therefore Bobby has $108,000 of equity in the home. He has saved about $26,000 in taxes over the 10 years, because of the tax benefits of owning a home, which he has deposited into his savings account.

Joe’s net worth is $8,548, while Bobby’s net worth is $134,000 (equity + savings)

The difference in net worth is almost $500,000 after 30 years!

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