The first question we get from military clients PCSing to Hawaii is whether it's best to rent or own.
On one hand, renting seems to offer the very attractive prospect of immediate cash savings. If you rent lower than your BAH, that's extra money in your pocket, right away. On the other hand, a wise purchase can help you procure tens of thousands of dollars in wealth ... way more than you'd have if you'd chosen to rent. This type of wealth is not as obvious or immediate as savings you might get from renting, so its value is often overlooked.
Do homeowners know something that renters don't? Are you missing out on key information that would help you plan your future? If you are planning to be in Hawaii for at least 3 years, here are a few details to consider that will help you make an informed decision.
First, let me point out 2 huge perks for military buyers. You probably already know about them...
Honolulu BAH. The Basic Allowance for Housing in Honolulu is among the highest offered in the nation. An E-5 with dependents gets a BAH of approx. $3000. Over the course of 3 years, that's $108,000 you would never see if you decide to live on base. Check your BAH here: http://www.defensetravel.dod.mil/site/bahCalc.cfm
0% down VA loan. Up to a purchase price of $721,050, you don't have to put any money in for a down payment. And most homebuyers would need to put 10%-20% down in order to get kind of interest rates that are available to VA buyers who put 0 down. (Generally, the lower the down payment, the higher the interest rate.)
Now here are four ways buying real estate builds wealth.
4 WAYS BUYING REAL ESTATE BUILDS WEALTH
1. Rising value. What's the real estate market like in Honolulu? Here are some facts: Between 2011 and 2014, the median sale price for a single family home increased by about 5% each year. Doesn't sound like much? The difference in home equity after 3 years was $100,000! See the numbers here:http://hicentral.com/oahu-historical-data.php
2. Adding equity. This is the "forced savings account" you hear homeowners talk about. Your home equity increases as property values rise AND as you pay down the mortgage of your house. After 3 years, on a $600,000 home (with today's interest rates) you will have paid down your mortgage loan by about $36,000. That money is yours, in the form of equity in your home. This means that even if your property value stays the same, you will have saved $1,000/mo in the form of home equity.
3. Tax Savings. Your monthly mortgage payment includes interest on your loan. The unfortunate fact is, you'd be paying a lot of money in interest. But here's the silver lining: at tax time, the money you paid in interest gets deducted from your year's income. This is called a top-line tax deduction. Approximately 25% of the interest you paid can be retained in the form of tax savings. Please consult your tax professional for more comprehensive information (we are not tax advisors).
4. Inflation protection. Simply put: rent payments go up, while mortgage payments stay the same. Next year your landlord may decide to raise your rent by 5%. As a short-term renter this may not be a big deal, but consider the wealth accrued by the long-term owner. On your house, your mortgage will stay the same for 30 years. Wise owners who bought a house in Hawaii in 1985 have made hundreds of thousands dollars in the ways mentioned above and from renters ... whose payments have quintupled from 30 years ago.
Whereas renting may save you thousands in the short run, owning can help you procure tens, perhaps hundreds, of thousands in the long run. Don't miss out on the benefits you've earned.