THY4373 wrote: ↑
Fri May 25, 2018 8:16 am
Perhaps it is my lack of imagination or coffee this morning but I don't get how the imputed tax free rent to myself would put even an extra dollar in my back pocket? I am a W2 employee so lets call my income and therefore tax more or less fixed. If I spend $1500 on rent or I pay zero because I own my home outright my taxes are the same (ignoring whatever deductions I may or may not get on property tax). Since my alternative investment options outside a house are also tax sheltered and I cannot quite fill them up with my current income (the remainder is filled up with re-balancing of my taxable account) I don't see where the imputed tax free rent to myself actually puts me in a better financial position?
If the alternative to home equity is also tax-sheltered, then the tax-free nature of imputed rent is not, by itself, a reason to own your home. But the high risk-adjusted rate of return from home ownership could still tilt the scales. See below for an example.
But tax shielded accounts will have many advantages that would have to be weighed against the high risk-adjusted returns of home equity. I think if someone has run out of tax shielded space, owning the home becomes really compelling. But when compared to tax-shielded investing, it's a tougher question.
ignition wrote: ↑
Fri May 25, 2018 6:46 am
Seattle has a price to rent ratio of 25-35 depending on where I look on the internet. How can it be better to own in this case? (from a purely mathematical point of view)
Even with housing prices as high as it is in Seattle, I still find that owning is cheaper than renting here. Here's an example:
On Redfin, I searched for condos in Capitol Hill that sold in the past 6 months. On apartments.com, I searched for 2 bdrm condos for rent in Capitol Hill. I then tried to find a building which had a unit that sold in the last 6 months, and also has a unit currently listed for rent on apartments.com. I got 530 Broadway E -- Units 127 and 209 were sold in the last 6 mos, and Unit 138 is listed for rent on apartments.com.
530 Broadway E #209
2 bed 1.75 bath 1076 sqft. Sold for $805,000 on Mar 6, 2018
530 Broadway E #127
2 bed 2.25 bath 1,333 sqft. Sold for $849,950 on Dec 22, 2017
530 Broadway E #138
2 bed 2.5 bath 977 sqft. Listed for rent for $3,050 per month. (It's not clear to me from the listing, but I don't think utilities are included.)
Both the rent and the prices seem to be on the high side of the range, so presumably this is a nicer building or location than the average Capitol Hill condo.
The rental is a bit smaller but has an extra 1/2 bath compared to the $805K. The sold units, especially the $850K one, looks nicer to me than the rental based on the photos. Let's take the $805K condo as comparable to the rental (more space, better interior, but missing 1/2 bath).
ANNUAL COSTS (excluding utilities):
$3,050 * 12 = $36,600
HOA: $623 *12 = $7476
property tax: $6,044
maintenance: $300 * 12 = $3,600
inflation-adjusted appreciation: $0 (no appreciation beyond inflation)
Let's assume for now that these numbers are constant in real terms. So rents and housing costs in Seattle will keep pace with inflation.
So what plunking down $805,000 for this condo buys you is a saving of $36,600 - $17,620 = $18,980
per year. That's a tax-free real return of $18,980/$805,000 = 2.4%
. That's pretty darn good for a safe asset. I claimed in my original post that owning your home is safer than holding stocks and nominal bonds, and comparable more to holding inflation indexed treasuries (TIPS). 30 year TIPS right now yields a bit less than 1% real. Compared to that, a 2.4% real yield is really good. And remember, this is what you get with no real appreciation in housing in Seattle! I think that's pretty unlikely in the long term in a city that's seeing growth. If instead you assume .5% or 1% real appreciation, the real return jumps to 2.9%
. That becomes pretty amazing for a safe asset! I don't think you can find that anywhere else.
If you have run out of tax-shielded space, owning a home is a no-brainer (as long as it's the right fit). But if, like THY4373, the alternative to parking money in home equity is also tax-shielded, the race gets tighter. Still, based on the numbers above, I think it would be very hard to find a safe asset that can match the rate of return on home ownership--even assuming zero real appreciation!
Note that the example above does not assume a mortgage. The return I calculated is the return from rent savings and potential price appreciation from owning your home free and clear. Most of us have to start out with a mortgage. When you are carrying a mortgage, it might be useful to construct a 100% mortgage scenario. You are somewhere on the spectrum between the 100% mortgage scenario and the 100% free-and-clear scenario. As you pay off the mortgage and build home equity, you are moving from the 100% mortgage end over to the 100% free-and-clear end. As most people know, the mortgage scenario is tax-advantaged as well, and the recent changes in tax laws have put a dent in that. But the tax advantage of the free-and-clear scenario remains unaffected by these changes. It will stay that way unless the US takes the highly unusual step of taxing imputed rent. To my surprise, according to this article
, there actually are five countries in the world that do this, including Switzerland and the Netherlands. But most countries, including the U.S., do not. So what you have now is a stronger reason to speed up the move from the mortgage end to the free-and-clear end -- i.e. pay off the mortgage sooner.