The best way to build equity for your dream home is to own a starter home. This has been true for generations, but is something that seems to be lost on our current generation. While researching the data for this post, I came across this article about home ownership and financial security. Entrepreneur David Bach points to the perpetual renting habit that millennials have as a big impediment to building wealth.
“As a renter, you can easily spend half a million dollars or more on rent over the years ($1,500 a month for 30 years comes to $540,000), and in the end wind up just where you started — owning nothing.
“Or you can buy a house and spend the same amount paying down a mortgage, and in the end wind up owning your own home free and clear!”
Of course, I agree with David Bach. I’ve been beating that drum for a long time while watching first time buyers turn away from anything that smacked of compromise. Meanwhile, as prices kept rising, many of my would-be buyers, kept missing the train.
For the last 6 years since the housing market turned a corner, I have been banging my GenX/Boomer head against the wall asking why on earth the millennial generation is still renting? Given what it now costs to rent so much as a coat closet, this isn’t making any kind of sense.
The infographic to the left is taken from an actual listing in the City of White Plains in early 2018. The asking price on the home was $625,000, so we are working with that price as the probably sales price. The home is 2200 sf with a nice yard. The taxes amount to $11,900 a year (without STAR savings – so in reality, the taxes are somewhat less). We are assuming a fixed rate loan at 4% and a 20% downpayment.
Now, many of the above parameters may be different depending on the circumstances. First time buyers will often work with a smaller downpayment and perhaps a variable rate loan. But these numbers give you a feel for why owning is so much better than renting.
I have that set at 20% for argument sake, which is $125,000. The monthly outlay on the loan along with taxes would amount to about $3380/month. That may be a great deal of money, but if you compare it to renting something comparable, you’d be forking out about $4250 a month. The difference between rent and overall outlay alone would save you $52,200 over 5 years! Who wouldn’t want to save that kind of money?
Over 5 years a typical 4% loan of $500,000 will generate $47,740 in equity. That’s money in the bank for when you buy a new home. The thing about owning is this: You give yourself equity every time you pay the mortgage. You can’t say that about paying the rent. When you pay the rent, the money is going exclusively to your landlord, who is the only person benefitting from this arrangement.
Appreciation can vary, but traditionally hovers around 4% a year. In this case, we are using 3% appreciation as a more conservative benchmark. This generates $99,550 in gains over 5 years.
In this scenario, the final nest-egg that you can create over five years is $324,490. That could be the downpayment on a $1.5 million home.
There are many variables here that would change these numbers, but the bottom line is this: NOTHING and I mean NOTHING beats homeownership when it comes to building equity. If you put the same $125,000 in the stock market, it would have to go up 20% a year every year for five years to give you a similar result. I’m no stock guru, but I know enough to realize that that is a very unlikely scenario. This is how people have moved up the home ownership ladder for generations. This is how your parents, grandparents and great grandparents did it.
For those who feel the downpayment is an insurmountable obstacle, take a look at the equity that can be built by owning a studio or 1 BR cooperative. Sometimes, our dream home comes in a series of steps.
The reason this works so well is that we all have to live somewhere. Either way, you are going to have to pay for shelter. A home can either be a rental OR it can be the investment that you live in. in the former, you are throwing money out the window, in the latter, you are building equity for the future. In fact, if you listen to David Bach, you would realize that owning a small home today makes it far more likely that you will be able to own your dream home tomorrow.
© 2018 – RGHicks – https://thewestchesterview.com – All rights reserved.
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