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Buy vs Rent Home | The Rent vs Buy Decision

June 14, 2022

Buy vs Rent a Home?

The purchase of a home is reaching an all time level of difficulty.  That means, the question of buy vs rent may have a different answer in 2022 — to renting being the wisest choice in 2022/2023.

US Fed rate hikes, and increasing loan qualification requirements means the 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.

Rocketing mortgage rates are exceptionally high compared to the lows we’ve enjoyed. Fortunately, landlords and the rental housing market are trying to provide relief.  Of course a lack of supply and new restrictions on development and investment could leave some without a place to live in 2023. It’s 2023 that’s shaping up to be a strong year for landlords and property managers, and one where renters will be competing for units.

Big Mortgage Payments are Painful

And when mortgage rates double from 3.3% to 6.3%, the resulting mortgage payment is unbearable for home 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.

Buyer demand is still high. Given some families must buy because rentals aren’t available, it means many will overextend themselves financially.  Heading into a recession, this is dangerous.

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.

Mortgage Payments Up.

Mortgage Payments Up. Screenshot courtesy of CAR.org.

 

Data released Thursday by Redfin shows that the typical homebuyer’s monthly mortgage payment has spiked 39% compared to a year ago. For the four weeks ending on April 24, Redfin found that the monthly mortgage payment on a home with the median asking price of $404,950 was $2,349. That calculation is based on the average rate on a 30-year fixed-rate mortgage, which is now 5.1%. — from a report on Money.com.

Rental Market Fulfills Many Current Demands

A report from CNBC suggests, renting is by far the most affordable and financially sensible choice. As the report shows, many workers can leave their high cost state and work remotely in other cities where they can rent. The trend to renting is strong for many reasons.  The built to rent market has grown strongly.

What to Consider?

A renter has it a lot easier to avoid the pressure of a mortgage, appliance breakdowns, roof repairs, home insurance, painting, and so on.

  • can you comfortably make the payment now, and in 5 years when you have to refinance?
  • what mortgage rates and terms is your bank willing to offer you?
  • can you pay all the taxes?
  • 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.

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.

Let’s not forget about cost of living increases as food, transportation, utilities, fuel, and more are rising fast. Employment is not so certain either.

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

Should We Continue Renting?

The answer for that question is increasingly Yes.

Economists are now obsessed with inflation and advising the government to push the economy into recessions to avoid bigger losses from inflation. The US money supply had grown so much that experts are saying liquidity is sloshing around in the markets like dirty water in a bath tub. Yet now the government is shrinking the balance sheet, stopping spending, and raising interest rates which actually adds to financing costs — not good for homebuyers.

Housing is in short supply and there’s little to suggest that housing supply in the major cities will improve. Without houses to buy, people will return to apartments to rent.

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

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%.

It’s uncertain as to why so many wealthier people are renting. It could be mobility, travel, or that home prices are ridiculously overvalued.

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

The challenge for house buyers is avoiding being overleveraged (living house poor) and deciding to move far away to acquire their dream home. Remember 2007.

Could Buying to Rent Tip the Scales for You?

Many renters desire to own their own home, build equity, and enjoy more security. Those are big incentives. Some very smart buyers look at this from an investment standpoint. They’re intending to buy to rent out a portion of the house. That’s how many successful landlords start out. Of course, that home may have to be larger than they’d originally planned, which raises purchase costs, ongoing maintenance costs, and a higher down payment.

Enthused with the success of their first rental, they realize investment rental properties are a legitimate way to make a lot of money. But that’s another matter.

Buying a house and renting out an apartment solves their dream and helps them fund it.

Earning rental income makes your buying position much more favorable. You’ll want to review the best types of property to buy, which cities are best (California cities too), and use a thorough system (multiple sources) to find a house to buy.

The Rental Market in 2022

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

Yet a number of factors can make buying a house a risky option. Job insecurity, lack of ideal home listings, high down payment, high home prices, and stringent mortgage qualifications will make buying a difficult choice, even for those wanting to rent out the basement.

Future job loss and unemployment periods raise the specter of losing your investment entirely. It happened in 2008/2009.

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 2022/23?

  • long term fixed mortgage rates keep rising
  • home prices falling
  • listings do grow 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
  • more new construction units becoming available but not enough to satisfy demand
  • construction slowing of late

When the Economy Comes Back

Home Price Growth

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:

  1. Don’t buy because you think it’s an investment, unless you plan to rent it out.
  2. Don’t buy because that’s what your friends are doing.
  3. 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.
  4. 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.
  5. 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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