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A Tale of Two City Homes

Even though I’ve sort of borrowed the title from a 19th-century classic of literature as my own title, I’d like to tell you about another book I recently read.  I’ll sum up the basic premise of the book with a quote from the author in an interview he gave to The Huffington Post:  “If your emotions are constantly being pushed this way or that way, and you feel like you’re never in control, it’s probably because you’re valuing a lot of the wrong things.”  As part and parcel to that thought, in the book he talks about the choices we make and our willingness to accept the “pain” that those choices carry with them – ironically, that pain is the key to our happiness.  Let’s look at a choice of options: renting a really nice apartment versus buying a very modest house. 

The apartment in question is two bedrooms and two baths, 1,200 square feet, and the monthly rent with a 12-month lease is $1,450.  The appliances are brand new, you have a really nice pool, a sand volleyball court, and a surprisingly large workout facility.  Also, you’re right downtown, so you’re surrounded by great restaurants and convenient shopping.  Bonus! 

The home in question is two bedrooms and two baths, 1,300 square feet, and the asking price on the house is $199,000.  On an FHA 30-year fixed mortgage at 4.25% (5.462% APR) with 3.5% down, the monthly payment (including taxes and insurance) is $1,354.  Obviously, it’s an older house, and it doesn’t have the pool, volleyball court, or workout facility.  The home is in the same general area, though, as the apartment, so you’re still close to the great restaurants and convenient shopping. 

The Pain
Let’s start with the house: it’s not brand new, you’ll have to maintain the yard yourself, and you’ll need to come up with the 3.5% down payment, which is $6,965.  If you want to have a workout facility, you’ll need to budget an additional $40/month to join a local gym.  Now for the apartment: after the first year, the landlord or management company is going to raise your rent.  Let’s be conservative and say it’s just over a 5% increase, or $75; the following year could be more because they want to spruce up the complex’s look.  You’ll only have one covered parking space, and it’s not right next to your apartment.  Lastly, while you’re on the ground floor so you don’t have to worry about stairs, you have neighbors above you who work odd hours and find slamming doors to be fun . . . at 3:00 a.m. 

The Payoff (Happiness)
This time, let’s start with the apartment: you don’t have to worry about any yard maintenance.  If the water heater springs a leak or decides to explode, you don’t have to pay to fix or replace it.  You might have rock-hard abs and a finely toned body from the workout facility.  Now for the house: each year at tax time, you get to deduct the interest you’ve paid on your mortgage – suddenly, you’re getting money BACK from Uncle Sam instead of owing him.  Home prices have increased conservatively at 5% year over year, which means your house has gone from being worth $199,000 to $208,950 – just by owning your home, you’ve earned almost $10,000 in equity in one year.  Last but certainly not least, your mortgage payment isn’t going up year by year.

So, let’s do some quick math: at the end of two years, if you choose to live in the apartment, you MIGHT have rock-hard abs at the cost of $1,450/month for the first year and $1,525/month the second year.  If you choose to purchase the house, you will have over $20,000 in equity and have saved $1,152 the first year and $2,052 the second year (mortgage versus rent).  In other words, you’ll be $23,204 ahead of the apartment choice with a healthy tax break.  Sounds to me like the pain is worth the gain – and you can do sit ups anywhere. 

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