There is no doubt that emotion should play a major role in your principal residence purchase decision. Our philosophy at CityScape Living is to build homes in stable locations, architecturally designed to stir emotion. Our gallery of homes reflects our attention to detail and desire to stir your emotions. We want our homes to be interesting, exciting places to live and play, something you will be proud to call home.
On the other hand, owning investment real estate should be focused on building wealth and tax reduction. The following numerical analysis is based on an actual CityScape Living transaction in late 2015 - a new 2,500 square foot 3 bedroom, 3.5 bath home in the 77006 Montrose zip code for $625,000.
Your monthly payment on a $500,000 mortgage (at 4.25% interest only), will run $1,770.83, and real estate taxes will run about $1,058.33, monthly. Deductible interest and taxes constitute tax reduction on your Federal Income Tax Return. The only two additional items of expense that are not tax reduction items (on your principal residence), are insurance, about $183.33 per month, and maintenance, about $250 monthly. Before tax reductions, your monthly cost of ownership works out to $3,262.49. After tax reductions, and assuming you are in the 28% Federal Income Tax bracket, your monthly ownership cost drops to $2,470.33.
So, how does this post tax reduction monthly ownership cost of $2,470.33 compare with the cost of renting the same or similar property. Assume in 2016 - $4,000 in rent plus dweller’s insurance of about $100, monthly. After tax reduction, you will own and residence in your new home for $2,470.33, monthly, recognizing a monthly savings of $1,629.67 (or $19,556.04, annually).
Now are you beginning to understand how your real estate purchase is strategic to building wealth. Your $19,556.04 post tax reduction savings works out to an annual return of 15.64% on your $125,000 down payment. Just looking at this from a pure tax reduction savings (putting aside cost to rent considerations), your ownership of this home is resulting in a Federal Income Tax savings of $9,505.98, or a 7.61% return on your $125,000 down payment.
There is one major building wealth and tax reduction component we have yet to discuss. Your new CityScape Living home will most likely appreciate during your ownership. Nationally, most people move once every seven years. However, for our calculations, let’s assume you will want to sell your home at the end of the fifth year of ownership. Assuming only 2% annual appreciation, your CityScape Living $625,000 home is likely to sell for just over $690,000. From a building wealth perspective, your $65,000 gain works out to an annualized return on your $125,000 investment of 10.4% - (65000 / 125000) / 5 = 10.4%). There is even better news on the tax reduction front; assuming you have resided in your CityScape Living home for two out of five years of ownership, there is no Federal Income Tax due. So, from the standpoint of building wealth and after consideration of tax reduction predicated on your annual deductions for mortgage interest and real estate taxes, your annualized return on your $125,000 investment works out to 17.01% (10.4% + 7.61%). Hopefully, the above analysis has sufficiently explained why real estate ownership is truly the best tax reduction and building wealth asset class that exists to date. If you plan to reside in your own home for more than two years, you cannot afford to rent long term. It would be like throwing money away. However, should you decide to rent, we hope you will consider a CityScape Living rental property.
If you need further clarification, please CONTACT US.