What expenses do you have buying a property in Miami?
- The actual average property tax rate for your metro area, you can also input your personal property tax rate as a percent of your home’s value or a national baseline assumption of 1.35%.
- Buying Closing Costs: Include loan origination fees, mortgage points, title insurance, appraisal, escrow deposit, fees for running a credit report, and other closing costs.
- Discount Rate: The opportunity cost of your money. It reflects what your money would earn as savings or investments other than housing. The higher the discount rate, the more expensive home ownership is because buying a home involves a big upfront payment.
- Down Payment: The share of the purchase price you pay upfront. Our baseline assumption is 20%. Unless you are a Veteran using a VA loan, putting less than 20% down typically requires mortgage insurance.
- An FHA loan: A mortgage loan guaranteed by the Federal Housing Administration and granted by a lender commissioned by FHA-approved lender. Loans that are insured by FHA are a type of federal support and it is historically known that they have allowed low-income Americans to take out a loan to buy real estate that they otherwise could not get with their wages. VA loans do not require a down payment or private mortgage insurance.
- Homeowner Condo/HOA Fees: This is for monthly condominium or homeowners’ association fees, or any other additional costs of owning not captured elsewhere.
- Homeowner’s Insurance: Typically required by mortgage lenders. We assume an annual cost of 0.46% of the home’s value. Homeowners insurance could be significantly higher if you pay high premiums for risk factors such as floods or earthquakes.
- Inflation: Impacts costs such as utilities and renovations, which we assume increase at the rate of inflation.
- Long Term Capital Gains Tax: Assessed if the sale price exceeds the original purchase price by $500,000 if filing as married, or $250,000 if filing as an individual. We have assumed a 15% tax rate. Your tax situation might be different.
- Military Service: Many Veterans and active duty service members are eligible for a VA loan. VA loans are issued by private lenders but guaranteed by the Department of Veterans Affairs. VA loans don’t require a down payment or private mortgage insurance. However, VA loans are required to pay an upfront fee.
- Mortgage Term: The number of years until the mortgage is paid off. Our baseline assumption is 30 years. Some mortgages have shorter terms such as 15 years.
- PMI (Private Mortgage Insurance): Private mortgage insurance is percentage of the original loan amount added each year. Included if the down payment is less than 20%, but drops to zero in the year after outstanding loan balance falls under 80% of home value. You can check the latest rates here.
- Renovations: Both regular maintenance and home improvement. We assume homeowners pay 1% annually of the home’s value, although this can run significantly higher.
What are expenses do you have renting a property?
- Valuation of rents: The cost of rent is likely to increase each year.
- Rent insurence coverage: This is a policy that insures and covers your personal belongings against damage such as fire, theft or vandalism. We assume this is 1.32% of the rent paid monthly. This is not a prerequisite.
- Price Valuation: The amount your home is likely to appreciate in value each year, but be warned the appreciation is volatile and unpredictable. We make a cautious assumption for each metropolitan area, based on recent long-term trends and in the local area, usually between 2% and 3% per year. This is a payroll valuation, not a real one. Selling closing costs: This includes real estate agent commissions, transfer taxes, property insurance charges and other closing costs when selling a home.
- Advance Fees: A portion of the percentage of the loan amount that is added to the VA closing amounts.
- Cost other than utilities to homeowners: Water, electricity and wastewater are often higher for landlords than for tenants. We assume that you would pay $100 more per month in utilities as a landlord than as a tenant.
Our methodology compares the total cost of renting vs the total cost of buying. To calculate the cost of renting, we start with the monthly rent and add renter’s insurance and a refundable security deposit. To calculate the cost of buying, we start with the purchase price and calculate the initial down payment and buyer closing costs; the monthly mortgage payment and other recurring costs like maintenance, property taxes, and insurance; income tax deductions for mortgage interest and property taxes; and the final mortgage payment, sales proceeds, and seller closing costs.
These costs depend on numerous assumptions, like your mortgage rate, your income tax rate, how long you stay in a home, and local home price appreciation: we provide baseline assumptions that we encourage you to tailor to your personal situation. Finally, we use a net present value (NPV) calculation to compare the total costs over time of renting versus buying.