I did not know. I just kept hearing everywhere that I should stop throwing money away on rent and start putting it toward my own house. Strong real estate market and the idea of “great tax benefits” convinced me to take the step. And now, one and a half year later I’m writing this article…

Conclusion: Considering current real estate market conditions and drastically increased homeowners insurance rates, here in Florida (and this might be true for other regions of the country, but I can’t speak to that) - short term ownership (5 years or less) is more expensive than renting. Unless you’re ready to “settle down” - you’ll be better off renting.

Basics: I was a single IT professional in my early 30th, being payed average salary, renting 1br apartment for $700/month.

History: Summer of 2005. Strong real estate market, everybody is buying, I made a decision to buy too. A couple months of search and one loan application later I became a proud owner of a $164,000 condo. I borrowed 100% of the condo cost (80% at 6.0APR for 30 years and 20% at 7.5APR for 15 years). My monthly payments were $1200/month and this included property tax. In addition to the mortgage payments I was also paying Home Owners Association (HOA) fee in the amount of $150/month which covered all the outside maintenance costs as well as building insurance. Therefore my total out of pocket expenses for living in this 2br/2.5ba condo were $1350/month.

Homeowner: I must admit - $1350/month wasn’t bad at all. If I was to rent a similar condo in the same condominium complex, my out of pocket expenses would have been a bit less, but not by much. Considering the fact that a portion of the $1350/month was going toward the principal ($250/month, to be exact) and keeping in mind the “tax benefits”, I was doing quite well. Also, the real estate market was strong and my condo was appreciating on average 5-10%/year.

Owning a condo under the conditions described above was well worth it. Here are some simple calculations to prove it:

Own		Rent
Mortgage (property tax included)	$1200/month	Rent of a similar unit	$1000/month
HOA fee	$150/month
Monthly total:	$1350	Monthly total:	$1000
Annual cost of ownership:	$16,200	Annual cost of rent:	$12,000
Interest paid each year: (tax deductable)	$9,000
Property tax paid each year: (tax deductable)	$1,500	Standard tax deduction	$5,000
Personal tax deductions:	$3,200	Personal tax deductions:	$3,200
Total tax deductions: (interes+prop.tax+personal)	$13,700	Total tax deductions: (standard+personal)	$8,200
Tax benefits: (this much more I would get back on my tax returns in case of ownsership [$13,700-$8,200]/4)	$1,375
Each year I paid this much toward principal on my mortgage	$3,000
Annual cost of owning adjusted (considers tax benefits and investment into principal: [$16,200-$1,375-$3,000])	$11,825	Annual cost of rent	$12,000

As you can see, as long as the real estate market was not declining - owning was $200/year cheaper than renting :) Not much, but considering that the market was, in fact, on its up-trend and my property was appreciating even when I was asleep - owning was a sure winner!

But things have drastically changed at the beginning of the following year. First, my property tax went up - instead of $1,500/year I was about to start paying $2,500/year. Second, due to the well known “Florida insurance crisis” my homeowners insurance went up 10 times(!), which resulted in the $360/month HOA fee. All of a sudden my projections were not as cheerful anymore :

Own		Rent
Mortgage (property tax included)	$1300/month	Rent of a similar unit	$1000/month
HOA fee	$360/month
Monthly total:	$1660	Monthly total:	$1000
Annual cost of ownership:	$19,920	Annual cost of rent:	$12,000
Interest paid each year: (tax deductable)	$9,000
Property tax paid each year: (tax deductable)	$2,500	Standard tax deduction	$5,000
Personal tax deductions:	$3,200	Personal tax deductions:	$3,200
Total tax deductions: (interes+prop.tax+personal)	$14,700	Total tax deductions: (standard+personal)	$8,200
Tax benefits: (this much more I would get back on my tax returns in case of ownsership [$14,700-$8,200]/4)	$1,625
Each year I paid this much toward principal on my mortgage	$3,000
Annual cost of owning adjusted (considers tax benefits and investment into principal: [$19,920-$1,625-$3,000])	$15,295	Annual cost of rent	$12,000

Back to renting: Owning this condo was going to cost me $3,295 more than if I was to rent a similar one in the same condo complex - ouch! Every year I would have to pay $19,920 out of pocket (comparing to just $12,000 if I rented), then I would get $1,625 back as “tax benefits”, and $3,000 would go toward paying off the principal - hence the $15,295 figure. BUT that’s working under assumption that the real estate market would at least remain on the same level and would not decline. Then and only then I could count on getting my $3,000 (which went toward principal) back if I should sell the property (or take out a home equity loan). To make the situation worse, the market has reached its peak and headed down. In a matter of few months market’s turn around I lost all the equity I had accumulated in my condo and pretty much was at square one, questioning myself if should I keep the condo or go back to renting? Under the circumstances it was clear, that I was going to be better off renting than owning. I think the calculations above are in strong agreement with the decision I made.

“But everybody is saying that renting is like throwing money away! What can you say to that?” you might ask. Let’s take a quick look:

Annual Cost Renting:
Annual rent = $12,000 (yes, you throw this money away)

Annual Cost of Ownership:
Annual HOA fee = $4,000 (you don’t get this money back - it’s all insurance, maintenance, etc. Basically, you throw this money away)
Annual Property Tax = $2,500 (you give this money to your county - roads, schools, etc. Kiss it good bye - you throw it away)
Annual Interest on mortgage = $9,000 (you definitely throw this money away)
Total Annaul expenses of owning = $4,000 + $2,500 + $9,000 = $15,500 (yes, you throw this money away)

So… by renting you throw away $12k while by owning you throw away $15.5k. Any questions?

“But everybody is saying that you get hefty tax benefits when you have mortgage! What can you say to that?” you might ask. Let’s take a quick look:

On a $160k mortgage I was paying $9,000 worth of interest. In addition, my property tax were $2,500/year. Finally, personal tax deduction is $3,200. This translates into $14,700 of tax deductions. Now let’s take a look at standard deductions which I would be paying if I didn’t have a mortgage - Standard deduction $5,000 + Personal Deduction $3,200. The total is $8,200.

So what do we have - $14,700 worth of deduction if I own vs $8,200 worth of deductions if I rent. $14,700 - $8,200 = $6,500 difference. Divided by 4 (which roughly is what I get in my income tax bracket) = $1,625. This is how much is the “tax benefit”. After I paid $9,000 of interest, $2,500 of property tax and $4,000 of HOA fees, do you think that $1,625 is really “a benefit” for me? :) I’d rather not have it (and hence not have to pay interest, property tax and HOA) then have to pay all of the above and get only 1.5k back.