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Should I Rent or Buy?

With the nation quaking in their collective real estate boots, the Portland real estate market is bucking the trend and is alive and moving forward. It’s not the scorching market of yester-months but we’re not seeing the bottom drop out like some had predicted.

RMLS Market Action for July puts 12 month appreciation around 18%. That certainly takes into account the hot months at the beginning of the 12 month cycle but if we end up around 10% appreciation for 2006, nobody should be complaining.

Rents are cheap compared to real estate right now. Rental rates have not increased as rapidly as property prices. Renting is often considered an investment for the future- your landlord’s. The costs to landlords will eventually get passed down to the tenant.

Let’s do a little simple math and see where it takes us (think big picture). One is to rent a house that just sold for $300,000. It rents for $1400 per month. A year’s rent is $16,800. The other option was to buy that house with 20% down. Last year, it would have cost about $246,000 if we use the 18% appreciation figure. 20% down would require $49200 cash. Today it would require $60,000.

Looking ahead, we predict appreciation for the next 12 months to be 9%. Our same $300,000 house is now worth $327,000 and our cash to buy it has increased to $65,400. A $60,000 investment has returned $27,000 equity in 12 months. Yes, we are ignoring the closing costs, costs to resell, the tax benefit and the higher cost of the mortgage compared to renting and other factors. Alternatively, you can spend $16,800 in rent. My rough calculation that your mortgage and taxes payment will be $1800.

But I don’t have $60,000! We’ll take the same house. Put zero down. Ask the seller to pay up $9,000 in closing cost and prepaid expense so the house effectively sells for $309,000. At the end of the year, there is $18,000 in equity for no out of pocket expense at closing. Rough mortgage calculation including taxes $2500. The difference is the amount of the loan and a higher interest rate for 100% financing.

Should you rent or buy? That entirely depends on your situation.

5 Comments on “Should I Rent or Buy?

  1. Rents are cheap compared to real estate right now. Rental rates have not increased as rapidly as property prices. Renting is often considered an investment for the future- your landlord’s. The costs to landlords will eventually get passed down to the tenant.

    Nonsense. The rental market has nothing to do with individual landlord’s carrying costs and everything to do with supply and demand.

    Consider two identical apartment buildings in the same neighborhood.

    Building #1 is owned by a little old lady who inherited it in 1963 and who’s costs are basically taxes and maintenance. She lives in a corner apartment and manages her own building. She needs $275/mo in rent from each unit to cover her costs.

    Building #2 is owned by a California speculator who bought at the peak of the market using some sort of zero down ARM. His rates are about to adjust way upward. He needs $2,750/mo in rent from each unit to cover his costs.

    Actual rents in both buildings are around $1000/mo which is what the market will bear. The little old lady does just fine, thank you very much. The speculator goes bankrupt after discovering the building is worth less than he paid for it.

    Current property costs and interest rates really have little to do with the rental market because at any given point, most rentals in Portland or any other city were not recently purchased. So the carrying costs for most landlords are mortgagages that they obtained years or decades ago when property values were much much lower.

    Looking ahead, we predict appreciation for the next 12 months to be 9%.

    On what basis are you making this prediction? Because it goes against the grain of just about every other prediction I’ve seen for Portland or elsewhere.

  2. Both of our posts are based on assumptions. First is that I am referring to single family homes and that an investor looking at buying a home in Portland as a rental is not going to cash flow positive with an assumed 20% down at current rental rates. This is also true for a homeowner “moving up” from the house they bought a few years ago and must either sell or rent the “old” house. This wasn’t an issue a couple of years ago. If the new investor can’t buy, the old landlord can’t sell. Either property values have to drop (happening around the country but not here (KGW reporter Joe Smith story last week)) or rents have to come up to equalize the situation. If a home that is a rental can’t be sold as a rental, the supply of rentals will dry up.

    My appreciation prediction is an educated personal opinion. Houses are still selling and interest rates have dropped over the last couple of months. Portland didn’t massive appreciation percentages on the way up and, in my opinion, won’t suffer the massive drops on the return to normalcy.

  3. Now is the time to buy. Rental rates are going up and prices have stabilized to an almost rational level. Over the next year most rental associations firmly believe that rental rates are going to go through the roof.

    BN
    4MySales.com A Simple System to Close More Sales

  4. your rough calculation mortgage and taxes $1800….how rough..what mortgage rate and terms and what are the taxes??? also what are the monthly costs for water, trash and maintence??? your numbers are bogus!!!

  5. Let’s look at “bogus”

    $300,000 property with 20% down at 5.75% interest over 30 years is $1400.57 per month.

    Taxes of $3000 a year is $250 per month.

    Keeping track? That’s $1675 per month PIT.

    $500 a year insurance gives us $1725.57 per month. So “rough” was on the conservative side.

    Pay interest only and save $250. So $1450 if you were bold enough to head that route.

    Water and utilities have no bearing. I am talking single family residences as rentals and usually the renters pay all utilities.

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