Friday, August 20, 2010

Renting Makes Sense in the High End

I'll say it now.   The new American dream at present is renting.  And there is nothing wrong with that! 
 This is driven by the high cost of owning.  In the high end, why in the world would anyone buy when they can rent a high end home for close to half the cost of owning.  Not everyone can play this angle of course.  But the real cost of renting a home that would cost about $6,800 a month to own is roughly $4,000 per month.  This assumes of course that the value of the home is flat which is realistic for at least the next 2 years.  This also assumes that you don't spend your huge downpayment and it is earning 3% interest or dividend income and that you are in the 40% tax bracket. 

It gets really interesting if you then factor in decreasing home values in the high end.  This is reality and the homeowner really takes it in the shorts.  A $600,000 decline in the home's value in one year is $50,000 per MONTH in losses for the owner. But not the renter.  I'm so glad the owner is subsidizing my lifestyle while I live in his deluxe OC beach-close home!  I'll enjoy it while it lasts!  Then I'll buy.


Anonymous said...

I think you should do the analysis on the after-tax basis. You will be suprised about the lack of savings...Do not forget the mortgage deduction on the first mil, oh, write-off the property tax, and maybe a little home office......Your 3% "dividend income" will be taxed high next year.....i think your numbers do not account for all the "FACTS". But then again, thats your MO.

Your 50K loss a month can easily be a 50K gain per month. Good luck matching that with your <1% interest CD.

Mr. Blue said...

Uhhh. It is an after tax calculation. Sorry to disappoint, but i did adjust the dividend income down to account for taxes. I included the mortgage tax deduction in my calculations. I will post a more in depth analysis soon. Feel free to post some facts of your own - I'm waiting.

Anonymous said...

Good. Post your facts and assumptions, then we can both run the numbers...

My assumptions are the individual is in the hghest tax bracket ( 4K rent would assume that). Also assume that mortgage is 5%. Property taxes and Mortgage interest is 100% deductible. I also assume dividend interest will be the same as income tax next year given the Bush tax cuts are gone. Oh yea, where are you getting 3% no-risk? I would like to know.
Those are my assumptions, what are yours?