The Rent vs. Buy Debate
The rent vs. buy comparison has been around as long as houses have been rented. Depending upon the perspective of the person that put the numbers together, it seems he/she can always “bake” the numbers to show any desired result. Mortgage people can always use a very low mortgage interest rate, assume unrealistic appreciation for housing and a very low comparative rate for investments and, viola!, you have a scenario the screams you should go buy today. Amazingly, the numbers even showed you should buy in 2006 because of the totally unsustainable value increases that were happening year over year through the early and mid-2000’s. We all know how that story ended now.
I wanted to take a conservative look at the numbers to see how the rent vs. buy comparison looks today. I will use a $300,000 purchase price and the minimum down payment of 3.5% required by FHA. The major components to look at for the rent side are the cost of taking funds from investments for down payment and closing costs as well as the actual the monthly rent. For these numbers I assumed that investments are making an 8% annual return, which is probably on the aggressive side and $1800/month rent, which is probably on the low side for a $300,000 house. The major points to consider for the buy side are down payment (see above), closing costs (I am using $4000), interest rates (FHA 30 year fixed rates are between 4.5% and 4.75 today, so I used 4.75%, APR 6.74%), property taxes, home owner’s insurance, mortgage insurance, and the major wild card is appreciation (I used ZERO). Using these numbers, the annualized cost of renting is $20,740 and the annualized cost of buying is $18,106 – a little over $2500/year for buying instead of renting.
Any of the assumptions that helped me arrive at these numbers could, of course, be debated, but most would probably agree that the assumptions are conservative across the board. I think it’s also important to state that, in my opinion, buying will really only make sense in today’s market if you plan to stay in the house a minimum of three years because of all the uncertainty today.
One quick additional note regarding the FHA purchase scenario above, the total monthly payment (principal, interest, property tax, home owner’s insurance, and mortgage insurance) would be approximately $2180/month. In order to qualify for that payment a buyer(s) would need to make a minimum of only $4600/month and have a credit score of 620 or higher. Of course all loans are subject to lender approval.
Do you know someone that is renting that would like to see how these numbers would work out for their specific set of circumstances? Through the magic of Microsoft Excel, I can pretty quickly customize these numbers to someone’s specific set of circumstance to see how the rent vs. buy scenario looks. BTW…while there is a different set of input numbers, the bottom line is equally or even more favorable for you real estate investor to buy rentals now.
Rates are still great and banks are definitely lending for residential mortgages – first time home buyers, move up buyers and investor alike. Please give a call to discuss in greater detail.
Timing is Everything…
I had two separate conversations this weekend that refreshed in my mind how many people are overlooking the importance of the combination of the current interest rate market and the now much lower purchase prices for houses. This morning I put some numbers together to help quantify to real savings.
To make this as simple as possible we have to make a hand full of assumptions. First, let’s assume the housing prices have fallen by 25%. Depending on where you live this number could be significantly higher. Next, let’s assume that the average 30 year fixed interest rate was 5.75% back before housing values and mortgage rates started to fall. Next, let’s use a $350,000 purchase price today, which would have been $437,500 at the top of the market when everyone was eager to buy. For simplicity’s sake we are going to also assume a 20% down payment.
There are many ways we could look at this number but let’s just compare principal and interest payments. At the top of the market, the $437,500 purchase price with 20% down would have had a principal and interest payment of $2042.51 assuming the 5.75% interest rate. Today, the discounted $350,000 purchase price of the same house with 20% down and using the average interest rate for all 30 year fixed loans I locked last week of 4.375%, the payment would be $1398.00. This payment is a 31.6% savings vs. buying the same house at the top of the market. In dollars, that is a $644.51 savings for the same exact house today.
Nobody knows how long prices and interest rates are going to stay at today’s levels. Maybe they stick around for a couple months…maybe they stick around a couple years. What I do know, is everyone likes to buy when things are on sale. With nearly every house on the west coast currently on sale for at least 1/3 off, and many areas over 50% off, now definitely feels like a great time to buy. When was the last time you saw something on sale at Nordstrom at 30% off and the asked the sales associate if it was going to be cheaper soon?
Whether you are a first time home buyer, a move up buyer or an investor I would love the opportunity to discuss with you if now is the right time for you to make a move. If you or anyone you know is thinking about or has mentioned possibly making a purchase please call me. I will do a very objective analysis to see if now is the time. Also keep in mind the possibility of refinancing if you already have a mortgage.
I look forward to talking to you soon.