Rent Versus Ownership - A Tallahassee Real Estate Case Study

I have written numerous blogs that have looked at the performance of different Tallahassee Subdivisions and have concluded each blog article with how the average home appreciated from 1991 through 2007. The following table summarizes each Tallahassee neighborhood that I have reviewed lately:

As you can see, all of the neighborhoods have performed well. With appreciation rates from 4.5% to 7.5%, the Tallahassee real estate market has done wonderful. Loaded with this information, I would like to demonstrate why home ownership in the Tallahassee real estate market is the single-greatest investment that a family can make. It blows away the stock market, and for most families, it is by far the smartest investment that they can make. In order to perform this analysis, we will look at a fictitious family, living in a fictitious Tallahassee Subdivision, and will use these assumptions (which are typical of what we see in the Tallahassee real estate market): Assumptions

• The family bought their home in mid-year 1991 and sold it in mid-year 2007
• The neighborhood in which they purchased experienced a 5% annual appreciation rate
• They purchased a home that was roughly equal to the median home value in 1991 for $90,000
• They financed the home with a FHA loan ($85,500 at 7% for 30 years)
• They could have leased a similar home for $900 per month (increasing 3% per year)
• Home Maintenance & Repairs for the family would be $2,160 the first year and represent 20% of each year’s gross lease

When somebody decides to move to the Tallahassee real estate market, they have two options. They can buy a home in Tallahassee, or lease a home in Tallahassee. We can then analyze the difference between the two actions and determine how smart the decision that was made proved to be. When somebody buys a house in order to make it a home, it is more than an investment. It is a place to live, plus an investment. We can place a fair market value on what the house could be leased for (a place to live) and subtract that from the cost of home ownership (an investment) in order to determine the value of the investment. The table below shows all of the expenses (including landlord insurance) that would have occurred with this home during the period from 1991 through 2007. The table below combines all of the costs together under “Ownership” and compares them to the “Rent” that would have been charged on this home. The “Difference” can then be seen as part of the cost (if positive) or benefit (if negative) of home ownership versus leasing. As we can see below, a home in this price range would have been pure benefit.

Finally, to determine the investment benefit, we have to calculate the Internal Rate of Return on the home owner’s investment and compare it with other investments the home owner could have made. The investment on the home would have been a five percent (5%) down payment (plus three percent in closing costs) which would have been $7,200. Had this money been invested in the stock market, in a fund matching the Dow Jones Industrial Average, it would have seen the following return:

Now we have a baseline for which to make a comparison. The initial investment (down payment plus closing costs = $7,200) could have been invested in the stock market for an after-tax internal rate of return for 10.2%. That is pretty strong. How will it compare with the Tallahassee real estate market?

Not even close! The median valued home in the Tallahassee real estate market would have yielded a comparable 37.5% internal rate of return over the same period. History keeps telling us to own our home.

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