From Bill Cullens example:
$105,000 purchase $ 5,245 5% down payment $ 99,655 mortgage
$ 2,229 Closing cost fees (with down payment, equals $7,474 due at closing)
Monthly cost of ownership:
$ 597.48 Principle & Interest (THEY assumed 6% interest) $ 110.00 Association fees $ 64.78 Mortgage insurance. $ 60.00 Taxes
% 832.26 Per month cost (assuming no interior maintenance costs)
This compares to 1 br apartments for rent ALL OVER WHITTIER for $500 to $600 per month.
The only way these condos make sense is if the buyer predicts that a) the condo market will continue to appreciate dramatically or b) the rental market will dramatically raise their rents. Because if one stashes the $7,474 due at closing and the approximately $200/month savings away, the nest egg (assuming NO investment return) is $20,000 in 5 years.
Nick Responds:
If you take a net asset approach to determining the question of rent v. own with these numbers I would say there should be a lean toward owning. Historically appreciation in the Metro Area is 5% annually - Next year it is expected to be 6%. Given 5% appreciation after 5 years you would gain $29,010 in equity. Add in the principal of $6,711 that has been paid down on the 6% mortgage and the original down payment of $5,245 and you have $40,965 in equity after 5 years. But we must subtract out the closing costs of $2,229 which means net assets for the buyer are up $38,736 after 5 years. Even at a more anemic appreciation rate of 3% you'd have an net assets increase of $26,451.
In addition to being better off financially there is the additional tax deduction available to some as was pointed out. There is also the fact that the buyer can finish and upgrade a condo to there preferences whereas that is not possible for the renter. The owner is hedged against rent increases that may occur as mortgage rates move upwards and they are five years closer to actually owning there home. Also, for many people like myself it is much less likely that I will actually save and set aside the $200 per month under the renting scenario whereas there is really no chance I would miss a mortgage payment. Finally, even a $20,000 downpayment on the same unit in 5 years would yeild an even bigger mortgage after taking appreciation into account.
Nick Frank Elliot Park
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