Q. Would you comment on my thinking about the own vs. rent decision?
First, even if I could sell my house, today, for $100,000 more than I paid, I could never sell it for enough money to recoup all the interest I paid on a 20-year mortgage, all the dollars for maintenance, all the dollars for insurance, all the dollars for property tax - over the 38 years I have owned the home.
Second, if I had rented all these years and saved all the money that I did not spend on interest, maintenance, insurance, and property tax - I would have a fat savings/retirement cushion.
I own a home that I purchased in 1976. I paid off the original mortgage early and paid off a second mortgage for a remodel early as well. Right now I'm just paying the local governments "rent" to live in my home, plus insurance and maintenance. —M.P., Austin, TX
A. How renting or owning works out, long-term, depends very much on inflation and how much your house appreciates. Own a house in a rapidly appreciating area and there is a chance that it’s appreciation and accumulated loan amortization will be as much, or more, than every dime you have ever spent on the house. The longer you own the house, the better the odds you’ll experience something close to this.
Suppose, for instance, that you buy a home that doubles in value over the 30 years it takes to pay off the mortgage. That’s an appreciation rate of only 2.34 percent a year. At the end of the period, not counting the cost of selling, you’d have both the appreciation (100 percent) plus the mortgage amortization (80 percent if you assume a 20 percent down payment). So you would have accumulated 180 percent of the value of the house in new equity, an average of 6 percent of the original value of the house per year. The fixed mortgage, meanwhile, was about 4.8 percent of the original value of the house, so you recouped your mortgage payments and had change left over to pay part of the tax and insurance bill.
If the home appreciates a little faster, or if you enjoy some tax savings, it’s quite possible that your house can be a savings account in disguise. Needless to say, it doesn’t always work out, particularly if you don’t own the house for a long time.
Q. Your recent column on the benefits of home ownership made me wonder if something my wife and I are thinking about makes sense. We are 75. Within the next five years we will sell our home and move, probably, into a garden home. Our children are doing well on their own.
What is the sense of us having a house in our estate?
We are contemplating renting from a son or grandson. All currently have houses with 15-year mortgages. How could they find better renters (I am a do-it-yourselfer)? And how could we find better landlords? We could draw up a lease that would guarantee the rent would equal mortgage, insurance and taxes. They would have the asset appreciation. (We live in Austin, which continues to enjoy home appreciation.)
We would have more money to live on and if we passed, our heirs will have cash instead of a house that they would need to sell. Thoughts? —B.R., Austin, TX
A. I’m not sure how you figure your heirs will have cash instead of a house to sell. What they will have is your estate, whatever it turns out to be, plus a rental property, which they may choose to continue to own or sell. If the house were in your estate they would inherit it at its value upon your death. If they own the house, they would own it at its depreciated (and tax liable) cost.
This doesn’t mean you shouldn’t do this, it just means you need to be clear on who is getting what. You’ll get to live in a rented house and have the use of your liberated home equity— which may, or may not, be enough to support you rent payments. In addition, any rental agreement will need to pass an “arms distance” test, meaning that your monthly rent will need to reflect local rent levels. That may be different from the sum of mortgage, tax and insurance payments.