Last week’s business column in the Blade discussed the developing status of Washington as a hip place to live, and certainly the increasing number of young people between 25-35 moving here would seem to support that.
One decision faced by these newcomers (and not-so-newcomers) is whether to rent or buy a place to live. Initially it makes sense to rent while you get the feel for different parts of the city where you might like to ultimately live. But once you decide you’re going to be in Washington for four years or longer, it probably makes sense to start thinking about buying a place—even a starter place from which you might move up.
I say “four years” because that is the average amount of time it will take for you to recoup your initial investment in buying—and later selling—a home. It will cost you around 3 percent in additional costs (mainly for title-related expenses) on top of your purchase price to buy a home. And when it comes time to sell, it will cost you around 8 percent of the selling price (mainly for commission expenses) to sell your home. So it’s going to cost you around 11 percent to buy and sell a home; assuming 2-3 percent a year in appreciation, you should be able to recoup that extra cost in around 4+ years.
One major hurdle in buying your first place is to come up with the down payment. It is a daunting challenge to save 10 to 20 percent of the purchase price of a home that may cost $400- 500,000. Even saving 3.5 percent (the minimum amount required for an FHA mortgage, now matched by some conventional mortgage programs) can be difficult when you are first starting out in your career. You may be fortunate enough to have a family member who will help you out with a down payment gift to get you started (don’t forget to get that gift letter from them). Or you may be able to qualify for one of the assistance programs like HPAP, run by the city to help first-time and low-income buyers with their down payments. And once you’ve “put your chips in the game,” you get to continue to play up as long as your stake increases. Plus you get a nice bonus every year in the form of tax credit for the interest paid on your mortgage.
So let’s return to the initial question that serves as the title of this article: Should I rent or should I buy? Let’s do the math:
Let’s say you’re paying $1700 a month for a 1-bedroom/1-bath coop apartment in a Navy Yard high-rise. In the course of four years, you’d pay $81,600—with no financial advantage to show, not even a tax credit. With a purchase price of $239,000 for the same unit and a 20 percent down payment (to avoid Private Mortgage Insurance) and a current interest rate of 3.5 percent, you would pay $1772 a month for principle & interest, coop fees (including taxes) and homeowner insurance. In the course of four years, you’d pay $85,056—$3456 more than renting, but¸ conservatively assuming 2 percent appreciation per year, your initial investment would be worth $259,000 and you would have paid off $15,479 from your mortgage, so you would have accrued $35,479 in equity. Plus you would have received a tax credit for $25,733 in interest payments, which at a 22 percent tax rate would give you credit for $5,661. So, even counting the fact that you would have paid $3,456 more by buying, you would have earned $41,140 in equity gain and tax deductions, for a net gain of $37,684.
Of course, as they say in automobile ads touting the fuel efficiency of a certain vehicle, “Your mileage may vary.” And in the case of considering whether to buy a home, you should start by consulting a mortgage professional who will help evaluate your situation and mortgage-readiness. But when you are ready to buy, a home continues to be one of the best investments you can make, especially over time and in spite of periodic market adjustments like the one we’re just recovering from. And unlike stocks or other investments, you actually get to live in this one while your investment appreciates.
Ted Smith is a licensed Realtor with STAGES Premier Realtors specializing in mid-city D.C. Reach him at TedSmithSellsDC@stagesrealtors.com and follow him on Facebook.com/MidCityDCLife , Youtube.com/TedSmithSellsDC or @TedSmithSellsDC.