The Wealth Effect of BUYING vs. RENTING in Northern Virginia; Owning a Home Outperforms the Average U.S. Savings Rate by 5X

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There are Numerous Benefits to Owning a Home Compared to Renting
In my last month’s R/Eview – October Issue, I addressed the numerous benefits of buying a home in Northern Virginia compared to renting.  I showed that it surprisingly takes 20% less income to buy a home than it does to rent the same home. The U.S. tax code favors home ownership. Owning a home has several qualitative benefits including stability, positive impacts on child development and school performance, and fulfillment of the American dream.  Many renters are under the misconception that a mortgage loan is out of their reach and it requires a large down payment.  I also showed buying a home can be done with little to no down payment and across a wide range of credit scores. Credit scores under 620 can even qualify.
Home Ownership is the Proven Escalator to Wealth in America
By far, buying a home is the strongest path to wealth creation.  There are certainly a number of anecdotal quotes by successful real estate investors who address the subject.  Like David Bach from AE Wealth Management who said, “If you’re not prioritizing home ownership, you are making a costly mistake.  Buying a home is the escalator to wealth in America.  Homeowners are worth forty times more than renters.”  Then there’s Thomas Stanley, author of The Millionaire Next Door who said, “There are under accumulators of wealth, average accumulators of wealth, and prodigious accumulators of wealth.  If you want to be a prodigious wealth accumulator, then own real estate.”Home Ownership Outperforms the Average Savings Rate by a Factor of 5X
Beyond the quotes, I try and open a person’s eyes with numbers.  Numbers are an unambiguous arbiter and can often help people quickly understand exactly what’s important.  The infographic below is the follow-up to my contribution last month.  Last month, I showed it takes $417/mo. less to own as it does to rent the same $340,000 townhouse in Falls Church 22043.  This cash benefit is primarily the result of federal and state tax benefits related to the mortgage interest and real estate tax deductions.  I now take it a step further and estimate the level of wealth creation attributed by the same piece of real estate.  In addition to the $417/mo. cash benefit that would otherwise be lost to a landlord by renting, the buyer grows equity through the amortized paydown of the loan principal.  Each monthly mortgage payment reduces the loan amount by $394.  However, the wealth accumulation effect does not end there. Since 1987, real estate has appreciated on average 3.75% per year.  I assume a conservative estimate below of just 3% appreciation, which produces an additional $850/mo. in wealth.  All told, the buyer of this home in Northern Virginia would amass nearly $100,000 in wealth in just five years, and nearly $200,000 in ten years.

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Attention Renters – There are Serious Qualitative Advantages to Buying vs. Renting
What does this all mean?  Most renters and first-time home buyers don’t realize that buying a home in the Northern Virginia region produces 5X more than the average savings rate in the U.S.  The median annual household income in the U.S. is $62,175 and the average savings rate is just 6.4%.  The average household saves just $3,979 of their annual income.  In the example above, the homeowner accumulates $20,000 in wealth per year – a factor of 5X.  If you want to be a prodigious wealth accumulator, then buy real estate.
Low Down Payment Options From 0 to 3.5% – Wide Range of Credit Scores
This is one of the most common misconceptions for buyers.  Northern Virginia home buyers have all kinds of financing options available with little money down and against a range of credit scores.  For example, Conventional Financing requires as little as 3% down and the best interest rates are still available to borrowers with credit scores over 700.  FHA Financing can be secured with only 3.5% down and a credit score as low as 620.  For first-time home buyers (or those who haven’t owned a home within the last 3 years), the Virginia Housing Development Authority (VHDA) even provides loans with up to 101.5% financing, meaning no down payment is required and your closing costs can be included in the loan.  There are even lending programs available to borrowers with credit scores as low as 580.  Experienced agents can connect buyers to lenders who can pre-approve you same day for a mortgage loan.
Executive R/Eview
Last month, I showed it takes 20% less income to buy a home in Northern Virginia than it does to rent the same home.  This equated to $417/mo for a townhouse in Falls Church 22043.  The U.S. tax code favors home ownership rather than renting.  Homeowners enjoy a pathway to serious wealth accumulation, as well as significant monthly cash flow that would otherwise be lost to a landlord.  In the example above, the homeowner would produce wealth accumulation of $20,000 per year – this is 5X the average savings rate in the U.S.  There are calculations one can use to determine if you are an under accumulator, average accumulator or prodigious accumulator of wealth.  The common denominator prodigious accumulators of wealth share is owning real estate.
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