Buying vs. Renting – A Tale of Two Decisions

Purchasing a home is one of the major life events during an individual’s life and recent millennial residents have had to rethink going through this life event due to the high principal needed and the recent increases in interest rate. The Fed recently raised interest rate for the fourth time in Year 2018. People who have an adjustable-rate mortgage (ARM) should expect to pay more interest due to this hike. It is easy to see why Robert Kiyosaki calls mortgage a liability instead of an asset in his renowned book “Rich Dad, Poor Dad.” If you have to pay the loan interest and property tax along with constant repairs on your home then at some point it is a good check to run the math to see if a home is really worth it from a financial standpoint.
The average home price growth rate in the United States is about 3.7%. Using that value, a $200,000 home will be worth $332,608 after 15 years (the typical time a single family house is occupied). After accounting for the average yearly property tax rate of 1.15%, that value drops down to $284,531. Now, let us make an assumption that the principal was borrowed with a 20% down-payment and a 4.75% interest on a 15-year loan. The realized profit at the end of year 15 drops to a negative including repairs and home up-keep expenses of $2,000 per year. Now, this loss does not include the cost of home insurance which is typically required by most lenders. You can see why some folks are hesitant to own a home and would instead rent.

Turning Real Estate from a Liability to an Asset
An efficient way to turn the owned property from a liability to an asset is by renting out a room in that home. Above is a comparison for both cases showing the impact of renting out a room and turning the home from a liability to an asset.
Another option would be taking your income and putting that towards an online real estate investment trust (eREIT) in order to generate passive income throughout the 15 years. Fundrise allows an investor to invest for as low as $500 and is open to both accredited and non-accredited investors. You can read my review of Fundrise for further insights.

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