Rent or Buy? Market Offers Unique Opportunity

Especially in today's market, which offers opportunities to qualified prospective buyers, renters would be wise to ask a few fundamental questions:

Is it true that a mortgage could be equal to or only slightly higher than a monthly rent payment? Will any increase in payments or expenses be offset by tax benefits and long-term appreciation? Is now truly a good time to buy a home?

Every individual's situation is quite different, but sometimes the best way to decide is to get out a piece of paper and a pencil to list the pros and cons of buying versus renting.

The two lists below review the most obvious advantages and disadvantages of both, but everyone will have different issues and items to add to each list.

Home resale prices are soft now, yet keep in mind that, on average nationwide, homes appreciate about 5 percent a year.

"€œAverage"€ is the important word.

Buying now might offer advantages when it comes to prices, terms, and selection, but anyone who feels fairly certain they will be moving in the next year or two most likely would be better off waiting to buy.

But if no moves are likely over the next three to five years, now could indeed be the time to buy. Keep in mind that unless a home is purchased with all cash, the beauty of home ownership is that money invested is highly leveraged.

For example, let's say a condo is purchased for $200,000 with a down payment of 10 percent and a 90 percent loan. Let's also assume the condo is in a neighborhood that even now–yes, some neighborhoods throughout L.A. are unaffected by the financial meltdown–is appreciating 5 percent or $10,000 each year.

That means the buyer earned $10,000 with an investment of $20,000 based on the new home value of $210,000.

This is because the 5 percent increase was on the $200,000 of the home, not the $20,000 initial down payment. At that rate, the annual "return on investment" would be 50 percent. (The yield of $10,000 is 50 percent of $20,000) Of course during that time, mortgage payments and property taxes must be paid along with other costs.

Expenses must be factored into the equation, but since the interest on mortgage and property taxes are tax deductible, the government is essentially paying part of the costs. For example, assume the initial loan balance is $180,000 with an interest rate of 6 percent.

If the first loan payment were Jan. 1, the buyer’s taxable income would be $10,800 less at the end of the year due to the tax benefit. Plus, paying property taxes reduces taxable income approximately $2,000, depending on the location of the home.

Thus, the taxable income in this example is reduced by $12,800. So what is the bottom line with all of these numbers? If the buyer’stax bracket is 28 percent, the home buyer would get $3,584 "cash back" at the end of the year.

Only home owners reap this benefit. Renters get … nothing. The other major benefit, as mentioned above, is appreciation, a rate, which will go up or down depending on the market and the condition of the local economy.

Maybe a 5 percent appreciation won't happen the first or even the second year out, but when it does it will yield a gain of $10,000 in value.

That's money that goes into a buyer’s pocket. Renters get … nothing, but their landlords do. All of these numbers have the positive effect of reducing the real cost of homeownership.

Being confident enough to buy in these times is difficult, but history sho ws that buying a home frequently winds up being one of the best investments anyone can make and if not now, when?

Benefits of Buying

• Full tax deduction of mortgage interest and property taxes. In other words, the government makes part of each month's mortgage payment.

• Over time, appreciation in the home‘s value. For many people, their equity represents most of their retirement money.

• Freedom and quality of life. Owners get to do what they want because home is theirs!

• Over time, a home is a potential source of emergency cash and credit. Benefits of Renting

• Generally lower payments.

• Little or no responsibility.

• No repairs.

• Generally easier to move from location to location.

• No need to worry about a drop in home prices.

• A smaller initial cash outlay. You get to retain your savings.

Benefits of Renting

• Generally lower payments.
  

• Little or no responsibility.
  

• No repairs.
  

• Generally easier to move from location to location.

• No need to worry about a drop in home prices.

• A smaller initial cash outlay.
  

• You get to retain your savings.

The Southland Regional Association of Realtors is a local trade serving the San Fernando and Santa Clarita valleys. SRAR is one of the largest local associations in the nation.