The biggest financial decision most AAFMAA military members and their families make is whether to purchase a home or to rent one.
The decision of rent vs. buy sounds fairly simple. Many calculators exist to run the math (most indicating that depending on city and a host of other factors that it takes the consumer 9 years or so to make the math work; rent if less than 9 years in the property and buy if more than 9 years).
However, there are a number of factors that these rent vs. buy calculators miss. First and foremost is safety. Consumers are keen to the fact that many apartment buildings burn down due to smokers, people that have fallen asleep while cooking, and other unexplained human behavior.
Safety is first and foremost why a consumer should consider purchasing a single family home. Consumers do not meet the 100 or so apartment dwellers before renting. However, purchasing a home eliminates the countless issues associated with renting. When factoring in the potential loss of life, loss of furnishings, and burden of having to move due to the variety of safety events that can occur when renting, AAFMAA reports that the rent vs. buy decision accelerates to about 6 years.
Rent vs. buy calculators take into consideration a considerable number of variables. With mortgage rates at all-time lows, buying a home with a financially stable income is normally better than renting. Renters are already paying monthly rent, plus a profit to the landlord. Why not invest that money into a home that the owner can enjoy!
This brings up the second most important aspect of renting vs. buying. When renting, the renter really doesn’t make any improvement to the property. The landlord looks to minimize expenses and so the renter really gets an inferior life experience. The quality of a rental is typically less than home ownership by its very nature of transient occupancy.
Whether it’s that odd smell, water damage, leaky toilet, or never updated look, renters can’t quantify in a rent vs. buy calculator the effect pride has on home ownership.
Many AAFMAA members understand these obvious benefits, and the incredibly low interest rate environment. According to the National Housing Conference, “the homeownership rate for veterans in the US is approximately 77.5%, which is approximately 10% higher than the national average of 67%” – indicating that homeownership is within reach for more American veterans than ever before. These numbers also indicate that hard working Americans who have fought for our country, along with their families, want to own property and appreciate the American Dream.
AAFMAA doesn’t recommend purchasing a home if the consumer doesn’t plan to stay in the home for at least 4 years. The cost of the transaction varies by state, so this number is longer in high cost closing states (think the northeast and mid-Atlantic states) and lower in states like North Carolina where there are no transfer taxes, no refinance or purchase taxes, and an ultra-low closing cost environment.
The third item that consumers should be aware of focuses on the 1040EZ tax return. If a consumer makes less than a certain dollar amount, then they may not get the full benefit of the interest tax deduction. This is a decision the consumer needs to consult with a tax accountant, as with the Alternative Minimum Tax, there are more instances where the consumer will not receive the full benefit of the tax code’s interest deduction.
Additional home ownership benefits include 4) Building Equity – rent payments go to the landlord, whereas a portion of mortgage payments pay down principal; 5) Gaining a potential tax advantage 6) Stabilizing (Rent) Payments – rent often times goes up, whereas a 30 year fixed mortgage is just that: fixed for 30 years. 7) A Sense of Community – homeowners are more involved in their communities and family friends are more likely to spend the night in a home. Sleepovers with the kids can’t be quantified in a rental.
So, as the consumer can see, and as AAFMAA members have come to know, home ownership can’t be quantified simply in a rent vs. buy calculator.
About the Author
Andrew May has 25 years of mortgage banking experience both owning his own firms, as well as working for AIG, JPMorgan Chase, and Allstate Insurance Company.