6th Step to Financial Freedom – The Rent vs Buy Real Estate Decision
The classic advice has always been to purchase your home if you can afford it, but in the military the decision is much more complex. You can’t simply compare your rent versus a mortgage payment. You have to consider tax breaks, fees associated with purchasing real estate, and how long you expect to stay at your duty station. Here’s a breakdown as I see it:
Benefits of Home Ownership
- Interest payments and property taxes are deductible.
- When you sell, gains on home value are federal tax exempt up to $250K if single and $500K if married.
- Making regular mortgage payments forces you to save.
- You can get some significant asset protection as many states protect home equity from lawsuits.
- As you make mortgage payments and accumulate home equity, it serves as a diversifier in your investment portfolio. Real estate is a great hedge against inflation and is only moderately correlated with traditional investments like stocks and bonds.
- Mortgage rates are rock bottom right now, making it easier to purchase a home.
Downsides of Home Ownership
- Most home purchases have a 3-5 year break even period, which just happens to coincide with the length of most residencies and military tours of duty.
- Real estate appreciation barely keeps up with inflation over the long haul.
- Sudden moves can force you to either sell your house or become a landlord.
- The classic teaching is that purchasing a home is a great investment because you don’t have to pay rent, but buying a home that is too expensive will harm you financially because of all the associated costs, such as heating, cooling, insurance, maintenance, buying, and selling. Expect to pay 5% of the value of the house when buying it, 1-2% of the value each year to maintain it, and 10% of the value when selling it.
Benefits of Renting
- You avoid the fees and ongoing expenses associated with buying, maintaining, and selling a home.
- Rental contracts have military clauses that will allow you to get out of a lease in the event of a sudden military directed move.
- In high-cost areas (Hawaii and San Diego are frequent duty stations that fit this description), it is often much more affordable to rent than to buy.
Downside of Renting
- You don’t get the benefits of home ownership listed above.
Rent vs Buy Calculators
You don’t have to make this decision on your own. Here are two on-line calculators to help you make your decision:
New York Times Rent vs Buy Calculator
The reality is that this is a very personal choice, and there really isn’t a right or wrong answer. What you should do will be based purely on your personal values and likely career path. My personal bias would be to make sure that by the time I retire I have paid off the mortgage on my primary (and hopefully only) residence.