The economics of buying a home in an improving neighborhood

You can now get regular financing on a house under $419,000 for up to 95% of the purchase price.

These aren’t FHA loans with high mortgage insurance payments; they’re relatively standard bank loans.

Thought I’d run the numbers on a standard, $350k house in an up-and-coming neighborhood to determine if it makes sense for renters to dive in.

Obviously, this post comes with my standard caveat about using lots of leverage: Leverage magnifies outcomes, both good and bad. So, if you’re going to use 95% LTV leverage you better be damn sure that either the value of the house is going to increase or that you will be easily able to cover housing payment even in a down economy.

That said, let’s get to the numbers on a hypothetical $350,000 house with 2 beds, 1 bath and a bit of land:

  • Put down $17,500
  • Borrow $332,500 at 4.125% fixed for 30 years
  • Monthly mortgage payment of $1,611
  • Monthly property taxes of ($350,000 x 1.25%)/12 = $364
  • Monthly insurance of $1500 / 12 = $125
  • Reserve $100 / month for repairs
  • Total monthly payment of $2,200

Now, for most of the neighborhoods in question, $2,200 is a bit more than it would cost to rent the same property.

But owning is a bit more tax efficient than renting. Of your $1611 x 12 = $19,332 in mortgage payments in the first year, ~$13,620 is mortgage interest, which is tax deductible. Assuming your marginal tax rate is 30%, that $13,620 in mortgage interest saves you $4,086 in taxes, or $341 / month.

So, after taxes, you’re actually paying out $1859 / month to live in a 2 bed / 1 bath house in an improving neighborhood.

In my opinion, that is a deal worth doing. If you’re interested in doing something like this and you have good credit and around $25k-30k in cash, get in touch.