[DesertCat]

[ QUOTE ]

If you took out a $250,000 mortgage fixed for 30 years at 7% interest you would be paying $1,600 per month.

...

Right now you can rent a 3 bedroom, 2 bath house for around $1,300 a month, You could find a 2 bedroom apartment for less than $1,000. If you rented for 1-2 years you could easily put the $300-$700 month you save in a good interest earning place for a few years when the market is in less turmoil.


[/ QUOTE ]

I think you are on the right track. It's impossible for the vast majority of us to time markets. But it's possible to compare the cost of owning vs. the cost of renting. Though owning has some intangible benefits, you really want the costs to be at least similar before you own. After all if you make a mistake purchasing a home it's a very expensive and time consuming mistake to undo. And if you are a renter it's a lot less hassle because you don't have to maintain the place.

In this example, we haven't considered property taxes, insurance costs, maintenance, and lost interest/investment gains on our downpayment. Assuming this $250k mortgage is on a $300k home with $3K per year property taxes, $1k per year insurance, $1k per year maintenance and required a $50k downpayment, which could have been earning $2.5k per year in interest (5%). Your gross costs are $25k per year, or almost $2,100 per month.

Then you need to figure out how much of a tax deduction you will get. First you have to itemize, and if you make over $100k per year, you may lose some or most of your tax deduction because of the AMT calculation. But assuming you can keep all of it, and that you are in the 28% federal bracket, you'd be able to benefit around $5500 per year. So your net costs are about $1,600 per month.

Note: Don't get hung up on my estimates, use your own accurate numbers, I'm just showing you the template to doing the math.

But if you did estimate your ownership costs at $1,600 per month, and renting a similar place cost a similar amount, owning probably makes sense if you are planning to stay at least five years. Eventually you'll see some appreciation. You need at least 7% appreciation just to pay the realtor fees when you sell the place and break even, but everything over that will be gravy, so the longer you stay in the place the better ownership will work out.

If you are only going to own for a couple years, I'd just avoid the hassle and rent if the costs were similar.