I know you are wondering “Are you ever going to buy vs. rent in DC?” The buy vs. rent question has perplexed us for a while. We frequently discuss buying a DC Home. I watch listings and chat with realtor friends. It’s tempting to own a slice of this historic town.
So why not snatch up one of these beauties? A few good reasons. 1) We love our children’s public school. Living in boundary for that school limits us to about a 1-mile radius. 2) Within that 1-mile radius, few homes list for less than $1 million. 3) We love our apartment and its extraordinary view of the city.
Nevertheless, a listing caught our eye recently: 1,400 square feet in a neoclassical DC building for less than $1 million! The Husband and I went to take a peek. Here is what we found:
Large living room and open floor plan!
Large dining room and kitchen!
Large master bedroom!
This was an ideal unit to weigh vs. our current 2 bedroom/2 bathroom apartment rental. How would living in this unit compare to living in our apartment? Would it make financial sense to buy? Let’s first consider lifestyle:
Buy vs. Rent Lifestyle Analysis:
|Architecture||Mid-Century Modern; Bold Shaping.||Historic Neo-Classical; Beautiful Details Throughout.||Condominium|
|Sq Feet||1,200 sq ft||1,451 sq ft||Condominium|
|Kitchen||Small; Entry-Level Appliances; Cheap Countertops and Cabinets.||Large; Mid-Level Appliances; Beautiful Countertops and Cabinets.||Condominium|
|Living||Spacious; Large Windows with View of Rock Creek.||Cozy; Good Light.||
|Bedrooms||2 good size||2 good size||
|Closets||2 Walk-In; 1 Coat; 1 Hall||0 Walk-In; 2 Small Bedroom; 1 Coat; Built-In Cabinets||
|Bathrooms||1 Moderate Size; 1 Small; Cheap Countertops and Sinks.||2 Small; modest finishes.||
|Laundry||Laundry Room (think 4-plus loads at a time); $2 per run.||One Washer and Dryer per Floor, Free.||
|View||Large windows in every room with 10th floor view of Rock Creek Park.||2nd Floor view of Kalorama neighborhood.||
|Parking||Garage, $190 per mth||None.||
|Bike Storage||Cage; Repair Stand and Bench; $10 per mth.||Overcrowded Rack; Free.||
|Other Amenities||Rooftop Deck, Sun Room, Workout Room, Business Center.||Most amazing rooftop deck ever! Spacious view of Rock Creek Park.||
Lifestyle is a close call. What about finances? I asked my CPA, tax lawyer husband to use his mad excel skills to build a buy vs. rent spreadsheet. The NY Times buy vs. rent calculator is excellent, but we wanted more than a break-even point. We wanted to understand how buying versus renting affected our long-term investment goals. Let’s start with assumptions:
Buy vs. Rent Financial Analysis:
|Year 1 Rent (Mthly)||$3,200||General Inflation Rate||1.00%|
|Sales Price||$780,000||Rent Inflation Rate||3.00%|
|Homeowners Ins (Yearly)*||$200|
|Purchase Loan||Renters Ins (Yearly)||$200|
|Downpayment||20%||HOA Fees (Mthly)||$1,032|
|Financed Amount||$624,000||Maintenance Rate||2.00%|
|Note Years||30||Additional Utilities (Mthly)**||$0.00|
|Interest Rate||4.00%||Property Tax Rate||0.008500|
|Mortgage Ins Rate||0.0005||Purchase Fees||1.00%|
|Mortgage Ins Pmt (Mthly)||$0.00||Selling Fees||6.00%|
|Investment Rates||Tax Rates|
|Investment Return||6.00%||Federal Income Tax Rate||28.00%|
|Real Estate Return||4.00%||State Income Tax Rate||8.50%|
Now, the calculations:
|Interest Pmts||($444,902.71)||Rent Pmt||($1,826,895.96)|
|Homeowners Ins||($6,956.98)||Renters Ins||($6,956.98)|
|Real Estate Return||$1,749,850.06||Investment Return – Down Payment & Monthly Contributions||$974,700.67|
|Net Return||($426,626.13)||Net Return||($859,152.27)|
The below chart shows the comparison year by year. Both options generate net losses. The loss from buying begins to level out and recover at year 7. The buy line would likely continue to move up into profit territory after year 30.
What do you think? Did we make reasonable assumptions? Did we account for all the significant expenses? All the significant benefits? Your turn. Click on Real Estate Calculator to create your own analysis.
More than anything, we concluded that this type of financial analysis is difficult. Most of it turns on assumptions that are tricky to predict. And children don’t make financial sense, yet we have three. So for now, I’ll keep playing with function and style in our apartment.