By: Victor Normand
There are many considerations when trying to decide whether to buy or rent a home and there is no right answer that will suit everyone. This blog will deal only with the economics of the decision using a realistic set of assumptions and current market conditions. It’s a good place to start and allows for other life circumstances to inform the final decision. Just under 65% of Americans are homeowners and a majority of those who do not own homes would like to some day, according to the National Association of Home Builders. It’s still a big part of the American Dream.
In order to conduct the analysis, a standard model was used to compare both the short term and long term costs and benefits of both owning and renting. The specific numbers used to populate the model come from recent sales and rentals as published in the local multiple listing service (MLS PIN). A time period of five years was chosen as the length of occupany for both the renter and the buyer. The metrics used for both the sold and rented units were:
We found 23 sales and 25 rentals that met these criteria. The median sale price was $185,000 and the median rent was $1,550. The simple average was $177,661 and $1,541 respectively The median was used because there are as many sales below that number as above, so extremes do not effect the selected values.
For the rental units, we assumed rental insurance of $240 per year and annual rent increases of 4% which seems to be the market for two bedroom units.
For the sold units, we assumed 5% downpayment, a 30 year mortgage interest rate of 5.0 (FHA),closing costs of $6,000, property taxes of $2,123 annually, condominium fee of $393 per month, mortgage insurance at .5% of the mortage amount, and condominium unit owners insurance of $240 annually. Property taxes and condominium fees were also increased by 4% annually to be consistent with rent increases.
Based on these criteria, the total monthly cost to buy was $1,607 and the monthly cost to rent was $1,570. Over a five year period of ownership, the cash paid out for the buyer would be $97,879 vs. $101,944 for the renter. So, if you are paying more than $1550 per month and you can find a nice condominium for anything less than $185,000, buying is your best economic option.
There are two real sweetners for the buy option. Assuming a combined state and federal tax rate of 20%, a five year tax benefit of $10,752 would be realized by the homeowner. Additionally, the homeowner would have paid down the mortgage loan by $14,361 and can expect the property to have appreciated in value by $40,081 over that time period.
As they say in investing, past performance is not necessarily an indicator of future returns. The same holds true for real estate investing, including the purchase of a primary residence. But unlike stocks and bonds, it’s easier to ride out the slow or down years simply because you need to have someplace to live.
So, if you’re secure in your job, have managed to save for a down payment and have a good credit score,(680 or above) a closer look at some available real estate may make sense at this time. And as always, while formulas and rules of thumb are a good place to start, get a professional like a Resident Expertsm to work closely with you on this journey.