Rent vs. Buy... the Age-Old Question
by David Bediz for the Washington Blade
July 21, 2010

Rent vs. Buy… the age-old question
by David Bediz, Realtor

It used to be a foregone conclusion that buying was the obvious choice in the age-old rent-vs.-buy debate. Your mortgage interest is tax deductible, your payments are lower than a rental, and the value of your investment always increases over time, right? In the current real estate market, even in DC, that conclusion has been shaken up a bit and the question is not so easy to answer.

Let’s analyze the factors involved in making the home ownership decision more closely. First of all, what can your rental dollar buy you in terms of a home in downtown DC? A typical one-bedroom apartment costs about $1,800 in Dupont Circle, more or less. With today’s amazingly low interest rates around 4.5% (near record lows set just last month), that $1,800 buys you about $350,000, which happens to be the average cost of a one-bedroom here. So, factor in the mortgage interest tax deduction on the loan (which equates to a deduction of almost $17,000 in your first year alone, or a tax credit of almost $5,000 for most taxpayers) and it’s a done deal! You should definitely buy.

But we’re forgetting something… for that price, you’d be buying a condo rather than a house, right? Condo fees range from $150-$500 per month for most one-bedrooms in the area. Don’t forget property taxes too, which would cost about $200 per month. Add those in, and the tax-deduction benefit is pretty much gone. Then there’s the cost of maintenance, repairs, and the possibility your investment may actually lose value too. And what if you had to move or sell suddenly… taxes and real estate agent commission is expensive! DC sales taxes are 1.1% for both buyers and sellers under $400,000, and 1.45% above. Brokerage commission is usually around 6%. So to break even on an investment you make, the property has to sell for almost 9% more than you bought it for. It seems like buying in this market makes no sense, right?

At first glance that may seem to be the case. Why, then, do so many people choose to buy rather than rent these days? Our business barely slowed down after the real estate meltdown, despite flagging property values. Buyers, well aware of the cost and risks associated with purchasing, happily went to settlement for their first homes. Some of our clients have even sold and bought again since fall of 2008, perhaps losing a little money in the long term, but absolutely unwilling to even consider going back to a rental. Are these buyers crazy? Or are they just really good at wasting hard-earned cash?

For most of these buyers, the answer is not that they’re crazy. It’s that the feeling of home ownership and the independence and opportunities it offers is well worth the risks and cost. True, we may not be in a market where it’s significantly cheaper to pay a mortgage than rent, but there is an intangible, and perhaps priceless, value in knowing that if the washer ever breaks down, I can control how quickly it gets repaired. If I get sick of the wall dividing my kitchen and dining room, I can tear it down and put in a breakfast bar. How many landlords would say “sure, go to town” if you suggested that to them? And we may not be partying like it’s 2005 now in terms of ever increasing property values, but in time values will increase. Perhaps in two years, perhaps in ten, but ultimately real estate will prove to be a good investment as it always has been over time.

Further, we must remember the other huge benefit to home ownership: your fixed-rate mortgage payment amount will never go up, and rents generally increase every year. While your total monthly payment, even after tax benefits, may be higher than your rent now, they may be lower in two or three years, and seem dirt cheap after ten.

So, if you are asking yourself the age-old rent-vs.-buy question, ask yourself how much that feeling of pride and freedom is worth to you, and then invest wisely in a property you can see yourself owning for many years to come. If you are buying a starter home or condo, buy one you could rent out when you want to move out, if property values haven’t increased enough to pay for a sale. Or buy a place a little bigger and a little more expensive than what you feel absolutely comfortable with now, so that you can grow into it over time and save yourself the costs of an extra transaction. Either way, be prudent in your investment so you can buy with confidence, knowing you can weather a storm and bear the costs of an unforeseen need to move or sell, and knowing that those costs are worth it over your current rental payment.

David Bediz is a Realtor at Coldwell Banker in the heart of Dupont Circle. He can be reached at 202 352 8456 or through www.dwightanddavid.com.