Man Buys House, Raises Annual Income
I frequently find myself in conversations with people who are unaware that they could in fact purchase a home. There is a misconception that homes come with more bills than apartments, and that owning a home locks you in to living in one place forever. Ownership doesn’t mean you’ll incur additional expenses if you choose the right place for you.
On the latter point, if you’re planning on making a move and you’re hoping to get rich quick, don’t hold your breath. It costs more to sell a home than it does to buy a home because of the marketing costs involved, so you’ll want to make sure you stay in your home long enough for the value of the home to exceed the brokerage fees you’ll incur when selling. So, yes, you would probably be looking at a longer stay in a home if you own it than if you rent it, but here’s why it’s a better financial decision for your long term financial growth.
Owning real estate builds wealth. Renting builds someone else’s wealth. How can this be? Let’s look at a simple example. We’ll take two single adults, Joe and Larry, each making $30,000/year. (Note: I am not a lender and cannot be held responsible for the accuracy or realism of these calculations, but I’ll do my best.)
Joe Makes $30,000 year. He rents. His monthly rent is $1000.00. For the sake of simplicity, we’ll assume he has no other expenses. I know, not too realistic, but it cleans the canvas for the brevity of my point. Joe pays the government based on a 15% tax bracket. His tax bill for the year will be roughly $4099.00. That means that of Joe’s $30,000 salary, he takes home $25,901 and of that, he spends $12,000.00 on rent, leaving him with $13,901 for the rest of his discretionary and non-discretionary expenses.
Larry also makes $30,000 / year. He bought a $160,000.00 home at roughly 6.25% for 30 Years, fixed. (No idea how mortgages work? Check out one of my sponsors, Michelle Minnoch.) His mortgage payment is about $1000.00 / month, but the key difference is that part of the mortgage payment is interest to the lender, and the rest pays down the balance of the loan. Over the course of one year, where Joe would be throwing away $12,000.00 in rent, Larry only “throws away” $10,100.00 and the difference of $1900 becomes equity in his home and increases in value over time.
So, while Joe has thrown away $12,000.00, Larry has saved nearly $2000.00. Not only has he saved over the course of the year, he can also reduce his taxable income because the interest paid to the lender is tax deductible. Where Joe found himself in the 15% tax bracket, Larry can reduce his taxable income by the amount of interest paid out during his first year of ownership which amounts to about $10,000.00. Larry is still in the 15% tax bracket but he is taxed on only $20,000.00, which means his tax bill will only add up to $2599, a savings of roughly $1500.00 over Joe.
Joe pays Uncle Sam $4099 and throws away $12,000.00 on rent. Larry pays Uncle Sam $2599 and throws away only $10,000.00 on tax-deductible interest.
When Larry bought his house, he gave himself a $3500 raise. Joe is still renting. They both spent $12,000.00. Which one do you want to be?
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