Buy vs Rent Home | The Rent vs Buy Decision

October 01, 2023

Buy vs Rent a Home?

Americans, Canadians, Brits, and Australian renters still hear the same sage advice, “why are you renting? You’re throwing all your money away, you should be buying.”

But it’s been a long time since buying a home was a better choice to renting. And now in fall of 2023, renting is absolutely the best decision for the average American, Canadian or Australian.

Yet, for landlords, having a rental income property is gold. Those who made the decision to invest in rental houses, condos and apartments are enjoying the rewards of being a landlord. The income, tax breaks, and confidence that comes from owning are real, solid benefits.

Having your rental mortgage paid off by someone else is one of the best financial decisions you can make.

High Mortgage Rates Just Won’t go Away

Mortgages have climbed again to new painful heights, and many landlords are feeling the pain too.

US Fed rate hikes, and increasing loan qualification requirements means the buying vs renting question might be moot for many Americans. They will be shut out of the single-family housing market and forced into an undersupplied rental market. For the next 6 months, renting is the correct choice.

Will the buy vs rent equation change in 2024? Will home prices or rent prices fall? Mortgage rates aren’t expected to fall for the next year. The FED’s J Powell reiterated the need to hold the rates high to fight persistent inflation. It looks perhaps that the Democrat spending bills might continue, pushing trillions into the economy.

Until more unemployment is seen, the FED is unlikely to drop the central bank rate. A strong recovery is expected (waiting for rates to go down) so inflation would only take off again. And economists warn that inflation must be fully dealt with first.

The total number of homes for sale is down 19%, the biggest drop in a year and a half, and new listings are down 16.2% in Sept, 2023. — Redfin report

With new listings dropping across the US and new house construction starts falling, supply will dwindle, which keeps home prices elevated.

Pending-home sales drop 13% from a year ago as rates stay high — Redfin report Sept 22nd.

On the other side, are signs the rental market has flattened and may head downward in Q4, Q1 of 2024. Rent prices are falling with the exception of some hot cities.

Big Mortgage Payments are Painful

And when mortgage rates double from 3.3% to 7.3%, the resulting mortgage payment is unbearable for home buyers. Redfin reports the average monthly mortgage payment on a median-asking-price home was $2,605 at a 6.9% mortgage rate, for the week ending August 3, 2023.

As mortgage renewals come up in 2024, we’ll hear of more foreclosures and homes being listed to a pool of monied buyers.

And with rates as high as they are now, those refinancing soon at the new rates may have to sell their homes. So rising rates could free up some properties. Likely not enough to satisfy demand however and cost is ridiculous.

If you can afford it, it might still be viable as a rental unit, because there are strategies to set a good rent price and find ways to keep raising the rents by renting the best, responsible, and financially enabled renters. Yes, landlording is a business and it’s critical for landlords to make their investment viable. Without that, losses can mount.

C.A.R. Mortgage Payment Report

Two years ago, Attom Data released a report that says a median-priced 3-bedroom home is a better choice than renting in two-thirds of the US. Latest data from CAR.org in California reveals the shocking truth about mortgage payments. They’re rising, but this time for a real reason.

Price and Mortgage Payments Continue Rising. Screenshot courtesy of CAR.org.

Data released from Redfin revealed that the typical U.S. homebuyer’s monthly payments are up nearly 20% from a year ago as prices rise and mortgage rates rise. Redfin reports too that

Rental Market Fulfills Many Current Demands

An earlier report from CNBC suggests, renting is by far the most affordable and financially sensible choice.

What to Consider Before Buying a Home?

A renter has it a lot easier to avoid the pressure of a mortgage, appliance breakdowns, roof repairs, home insurance, painting, and so on. In this economy, it’s wise to consider your budget carefully and cautiously if you’re planning to purchase. There has never been a worse time ever to buy, other than just before the Great Recession.

can you comfortably make the payment now, until you can refinance at lower rates?
what mortgage rates and terms is your bank willing to offer you?
what are your utility costs and property taxes due, and will they rise?
can you pay all the taxes and fees?
are you okay with no vacations for years?
are you hoping to add children to your family?
is your job very secure?
will current economic trends hit your city hard?
is the home you can buy really acceptable to you?
is the current home prices in your city simply too overvalued?
do you have feelings of missing out?

And here’s a key matter for those who want to travel or need to move for a job:

“If you expect to be mobile and move within a window of roughly five years or less, you’re probably better off renting only because the costs associated with homeownership are significant,” said George Ratiu, senior economist with realtor.com.

And property taxes, insurance, Realtor fees and commissions, along with maintenance costs are more significant than most buyers realize. You’ll find out what landlords must deal with.

Flashback: Rent vs Buy back in 2007

Back in 2007, house prices were rocketing and flocks of people including first-time buyers were launching into homeownership. It turned out that buying was the worst decision and one that cost many of them dearly. An unfortunate number had their home foreclosed and went bankrupt. Was it fear of missing out that drove buying in 2007?

You can certainly use a buy vs rent calculator to calculate the liability short term or long term.

It’s a volatile time where employment, business success, and survival are all uncertain.

Should We Continue Renting?

The answer for that question right now is a resounding Yes. Unless, you’re a landlord investor renting in the right neighborhoods within the best cities.

Other Factors to consider?

does the economy and housing market resemble the 2006 bubble?
will I lose my job?
will I need to move and relocate?
how long do I want to stay where I’ll live?
how high will house prices rise or fall in the next few years?
how high will house rental prices rise?
will housing prices crash and by how much?
will mortgage rates rise?
how much are the hidden homeownership extra costs?
what will the future tax write-offs look like?
will your landlord be selling and requiring you to leave your rental in 2021?

Rent Vs Buy Calculation

Wealthy People Choosing to Rent

The number of high-income earners who are renting is growing strongly. How strange it is that people with lots of money are deciding to rent vs buy.

RentCafe reported that in Seattle, WA, renter-occupied households earning over $150K per year multiplied 7.4 times. And the number of Charlotte, NC high-income households living in rentals has grown by 400%.

Even for the wealthy, buying homes doesn’t seem too attractive.

Another trend of people moving out of the city, and even into other states are pushing up house prices in places such as Florida, Utah, Oregon, Arizona, North Carolina, and Texas. Even California house prices are rising as supply shrinks. And in the UK, buyers are weighing these buy vs let factors too.

The risk for house buyers is avoiding being overleveraged (living house-poor) and deciding to move far away to acquire their dream home. Remember 2007? However, moving to a city with better job prospects is considered a good move.

The Rental Market in 2024

Rent prices are moderating. The rent for townhouses and single-family homes is outpacing income but is not at the 14% growth rate it was earlier this year.

Rental prices will rise because new construction is falling far short of the 4.6 million units needed each year.

What’s Up for Home Buyers in 2024?

long term fixed mortgage rates keep rising
loan qualification very stringent as banks under pressure
home prices flattening
listings may grow in 2024 as rates fall, but great properties still hard to acquire
home prices are still outrageously high
rent prices aren’t going down much
economy is in tatters and could do poorly in 2023
wage demands could fall considerably
unemployment will grow since the FED demands it
more new construction units becoming available but not enough to satisfy demand
construction slowing of late

When the Economy Comes Back

Graphic Courtesy of GlobalPropertyGuide.com

Take this example below, for a small 2-bedroom home in San Francisco, San Jose, Toronto, Seattle, Vancouver, or San Diego:

Rental Investment Calculation

Price: $600,000
Mortgage: $500,000
Down payment: $100,000
Mortgage Rate Rising: 3.5%
Mortgage Payment: $3,028
Tax Write offs: Varies according state or province

Keep in mind, most buyers do not pay 10% to 20% downpayment.

Equity For Owners after 25 Years: $900,000, plus tax benefits + rental income + collateral for further property investing.

Equity for Renters: $432,000 spent for zero equity after 25 years.

Over the long term, buying easily wins if the buyer is solidly employed, withstands recessions, and rents out a portion of their home to create consistent monthly revenue, while enjoying further tax breaks. Buying to rent is a clear winner.

Buying rental property for growing income create even greater value. In fact, this is how most millionaires make their fortune. Choose the best cities for buying a rental property and you’re on track.

Lifestyle Renters are a Big Target Market

For the non-financial aspects, renting may offer better results. Those who need to be mobile for work, or who can’t really afford an expensive home, will be better off renting.

Many of the new rental buildings offer extensive services and lifestyle benefits. Retiring Baby boomers are renting in the Chicago rental market, Miami market, Phoenix market and Las Vegas market to savor lifestyle benefits.

Working Millennials, after making their rent vs buy calculations are seeing the benefits of co-living and apartments in key neighborhoods in these cities. For California, the prospects for buying are unfortunately slim.

Whether for retirement lifestyle benefits or career benefits, many multifamily developments are catering to these groups. Read more about the new developments in Chicago and Denver.

If you’re one of the many who are migrating to a new city, and have limited down payment funds, Austin, Oakland, Denver, Honolulu, Tampa, Miami, Dallas, or Charlotte, might offer better rental markets.

The US is Still a Renter Nation

The rental property market is strong because investors are buying properties to rent out. Some call them speculators, but they can and do buy properties and those properties aren’t for sale. This is why there’s been such a boom in the property management business.

They get the income earnings benefit, capital gains later, along with tax benefits. That’s dried up housing availability and raised home prices.

It’s not an inviting scenario for hopeful home buyers with simple wishes. That’s lead to America becoming a renter nation.

Does Buying Really Deliver Value?

There are many with an unshakable belief that a home is also a retirement savings asset, while others suggest that you can’t eat a house when you’re 65. Many seniors today can’t sell because there’s nowhere to go. In Toronto, Vancouver, or in most cities in California, buying may never make good financial sense.

Compare the Key Benefits of Buying vs Renting

creates long term wealth accumulation
tax advantages
rental investment income possibility
greater feeling of security and stability
interest rates are low currently
it may be cheaper to buy than pay high monthly rental rates
if you divorce your spouse, it could create severe losses
there is a housing crisis and big demand for any home or apartment should push prices higher
real estate as an asset has performed better than any other asset type in the last 30 years (if you consider tax write-offs, price appreciation, and rental income, it outperforms by far)

The Benefits of Renting a Home or Apartment

no downpayment stress
no worry about mortgage commitments
no high cost of house and property maintenance
no worry of buying a money pit
no worry of mechanical breakdown
freedom to travel and move
many buildings and condo complexes have fitness centers and swimming pools
no worry of real estate market collapse
unemployment doesn’t mean you could lose your investment

However, we’re still asking if buying a house right now in 2021 is wise or does renting a condo or apartment make more sense?

Other Considerations before deciding on buying or renting:

whether this is the right time to buy for you personally and emotionally — do you really want to be tied down to a house and property with all the stress and responsibilities?
will you be marrying and raising a family? — can you raise children well in a high rise condo or a downscale neighborhood where you can afford to buy?
how much house can you can afford, or can you really afford it all? — purchase and rent prices are so high in cities such as San Francisco, New York, Miami, Dallas, Austin, San Antonio, Denver, Seattle, San Jose and Los Angeles for instance, it may take all your income to pay for the cheapest unit.
how high will mortgage rates will climb — can you pay your payments if they rise by 70%?
how much other debt do you have? — do you have student loans and credit card debt to add to your mortgage payments?
alternative investments — what else could you invest in right now with your down payment (bitcoin, startups, gold, stocks)?
should you buy to rent out yourself? — rents are rising fast with very low vacancy rates ensuring a positive cash flow if you should rent out a portion of your house. This is a smart opportunity.

Buy vs Rent Cost Calculator

To get a better view of your buying vs rent decision, try out the rent vs buy calculator from the NY Times. This widget still requires your input on forecasting a few things, yet it might help clarify the pluses and minuses for you.

Graphic courtesy of NYtimes. Rent Vs Buy Calculator.

Additional Buy vs Rent Calculators:

Rent vs Buy Cautionary Points:

Don’t buy because you think it’s an investment, unless you plan to rent it out.
Don’t buy because that’s what your friends are doing.
Don’t pay the going asking price because the seller thinks it’s worth that much. Consider why they’re so eager to sell right now.
If you buy right now, you’re paying a speculation price. If you do buy, only buy at an affordable price for a home, condo or apartment.
The only exception to this would be to buy an investment rental property. When your property earns big income from hungry renters with few rental options, it’s a good investment for the next 5 years. If you have to sell it, you’ll likely see a positive ROI.

Good luck with your buy vs rent decision. Most renters will choose to continue to rent an apartment this year. Buying has its benefits when interest rates are so low. And if you’ve thought it through and are confident about your choice, feel good about what you’re doing. Being positive is a must for anyone.

Please read our new State of Property Management report, and learn more about what property managers are doing to improve their businesses.

Learn more about the current state of the rental market.

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