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Buy vs Rent Home | The Rent vs Buy Decision

November 24, 2020

Buy vs Rent?

As 2021 approaches fast, we’re all sensing a big economic change unfolding in the 2nd half of 2020.

It’s a volatile time where employment, business success, and survival are uncertain.  However, lots of first time home buyers continue to weigh the buy vs rent numbers, in the hope of perhaps buying a house.

It’s likely the most important financial decision many young buyers have ahead of them.  You can see the buy vs rent calculator cited below to do the math.

You might be a renter yourself, or you might be a landlord hoping to buy to rent.  Trends show an increasing shortage of houses available as demand is increasing again. Prices are expected to rise both for buyers and for renters.

Some experts suggest that if the rent vs purchase price is above 20%, it might make sense to buy. But your choice involves more than crunching numbers, because risk awaits. And there is big risk either way. For instance, many renters face eviction when the landlord sells the property.

We’re not out of the Covid pandemic yet and despite the optimism, there are real risks to the economy and employment. Recent employment trends are causing anxieties. Small business owners must be very smart in the next 8 months too.

Major Factors to consider?

  • how long do you want to stay where you’ll live?
  • how high will house prices rise in the next fear years?
  • how high will house rental prices rise?
  • will mortgage rates rise?
  • how much are the hidden home ownership 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?

Demand is so intense, home prices are rising fast and it’s pushing rent prices up as well.  Prices likely won’t get cheaper. Real estate prices rarely retreat.

New Buy Vs Rent Factors

There are additional buy vs rent home factors that have changed in the last year.

Homebuyers like yourself may face additional taxes, rising prices due to lower supply, job losses, shrinking US GDP, increasing development regulations reducing supply, rising cost of living and inflation-related challenges along with higher mortgage qualification rules.

Renting Still More Affordable for Most

Rent Vs Buy Calculation

Rent Vs Buy Calculation

For those with high financial resources, buying is better than renting.  Yet for those building toward a purchase renting does seem more sensible.

While house prices are rocketing, in general, rents aren’t. This should allow renters to save more money in 2021/2022 to allow them to afford a better home in 2023. Construction starts will grow after the pandemic and prices should moderate.

Wealthy People Choosing to Rent

Yet here’s the thing.  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 over valued.

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 downpayment.

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 2021

The year 2021 will bring more changes to the rental markets. And rent prices will likely climb, especially for townhouses and single-family homes. The dream of having one’s own home, building equity, and enjoying stability is alluring.

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.

As the Corona Virus threat eases and employment rises in 2021, it will support both apartment rentals and home buying.  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 2021?

  • long term fixed mortgage rates are falling further
  • home prices are stable
  • listings are falling to record lows
  • home prices are still outrageously high
  • rent prices aren’t going down
  • economy is in tatters and may not recover this year
  • wage demands could fall considerably
  • employment rates are at historic levels
  • more new construction units becoming available but not enough to satisfy demand
  • construction slowing of late
  • more people have saved the down payment putting price pressures up

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 consisten 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 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 just doesn’t make 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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