Is it cheaper to own or rent a home? I did a Craigslist search for a close in home with the complete property address listed so I could then research what I thought it would sell for as a comparison. I happened to find a home that sold for $150,000 at the end of last year. I can tell from the pictures in RMLS and the ones posted on Craigslist that some work has been done. I think I am being generous with adding $10,000 for a theoretical market prince of $160,000.
After adding in the property taxes and an educated amount for home insurance we get a payment of $1013.86 per month. The house is listed for $1250. The downturn in the real estate market has made owning a home more affordable than it has been in years. If you put down the FHA 3.5% down for a loan of $155,440 your payment would drop to $992 plus any required mortgage insurance. With 20% (investors may be required to put 25%) the payment is only $861 per month.
We need to acknowledge that this is massively simplified. Not everyone will qualify for a 4.0% loan, we haven’t addressed down payments, maintenance costs, tax advantages, market risks or anything else. It shows us one reason that investors are retuning to the market and the investment properties should cash-flow positive which they didn’t do at the peak of the market: appreciation was the carrot (and therefore not a sound investment strategy looking back). It shows how competitive the rental market has become and that may give some potential buyers reason to further investigate their own situation to see if which scenario works best for them.
It’s the “Perfect Storm”!!
This is kind of an apples to oranges comparison. You are calculating a premium on the mortgage to keep it fixed for 30 years. Imagine the rent rate you would have to pay to lease the house for 30 years fixed. Think what the rent rate will be in 2040!
To be fair, you should at least use the 5 year fixed rate of 2.75% which would lower the payment by about $110/mo. so rent is $1250 and payment is $903!
There are so many factors to the the equation that I aimed for a very general scenario. If I were buying property today I would consider paying the premium of a 30 year loan to give me options. I can pay it at a 15 year term but if things go bad for a month or longer I can revert to lower payments. I’d probably take a longer investment view than five years so I’d like to avoid the risk of higher rates five years from now. We also have to consider that lenders will add to the interest rate for investors. 4.0% seems like a good rate to start at to decide if you should further investigate your personal situation. We also have to acknowledge that the $1250 rental rate is what they are asking, not what they are getting. Maybe we should base our math on actually getting $1150???
I’m not saying someone should get an arm over a fixed, just that there is real value in a payment that wont go up, unlike rent.
I don’t see many rents going below asking right now, Portland has the lowest vacancy rate in the country and rents are increasing.
this is the best rent-or-buy calculator out there: http://www.nytimes.com/interactive/business/buy-rent-calculator.html