subject: Hollywood Hills Real Estate- Rent Vs Buy [print this page] Hollywood Hills Real Estate- Rent Vs Buy Hollywood Hills Real Estate- Rent Vs Buy
Putting A Roof Over Your Head or Investment?
So, if you look at a home as simply a means of putting a roof over your head and compare renting with buying a home, then renting comes out as less costly. In the Hollywood Hills real estate market, it usually is cheaper to rent than it is to buy. But if you add the investment value, then it is a different story and buying a home usually turns out to be a much better strategy in the long term.
Long Term Effects
Rents tend to increase over time. Again, assuming one has a fixed rate mortgage, the basic monthly costs of owning your home such as principle and interest remain stable. It is the relatively stable monthly costs combined with appreciation that makes home ownership so attractive in the long term. The chance to make money on borrowed money is known as leverage.
How Leverage Works
If you purchase a home for $500,000 and pay cash for it and in five years that home appreciates in value and is now worth $600,000, you made $100,000 on your investment. That's good. If however, you bought that same home and only put $100,000 down, making payments on the balance. In five years when the home is worth $600,000, you will have made $100,000 on an investment of $100,000 or doubled your money in five years. That's great. Now, until you actually sell the property or tap into your equity this is all theoretical but it shows why it is missing the point to make a simple monthly cost comparison between renting and buying.
Appreciating Appreciation
Any time your home is worth more when you sell it than it was when you bought it, the difference is the amount of appreciation. The more your home appreciates, the more equity you are said to have in your home. Equity is the difference between what your home is worth and what you owe on it. If you own your home free and clear and it is worth $500,000 you have $500,000 worth of equity. If, on the other hand, you owe $200,000 on the home, you have $300,000 in equity.
Tax Benefits
Property taxes are deductible on your Federal Income Tax and this also needs to be considered when looking at the difference between the cost of renting versus buying a home. In addition, when you sell your home, a portion of the profits is tax deductible. You can deduct $250,000 of profit if you file a single return and $500,000 of profit if you file a joint return.
Summary
While renting a home may cost less per month than buying a similar home in the short term, there are many other factors to consider in making any kind of true comparison. In the long term, when other considerations such as leverage, appreciation and tax benefits are added into the mix, buying makes more financial sense.
