Rent vs Buy Considerations

The US housing market at the end of 2022 was (as always) in a state of change. Home prices were down from their record highs in June but mortgage rates were on the rise. Given the ever changing conditions, how can you decide if you are better off buying or continuing to rent?

Eddie Martini, strategic real estate adviser at HouseCashin, a company connecting sellers with investors, says it all depends on someone’s financial goals.

“If homeownership is a goal you have been working towards and you have saved the needed down payment and are able to qualify for a purchase amount that will provide you the home and the location you desire without causing extreme financial stress and anxiety then buying would make more sense than continuing to rent,” he said.

With house prices starting to fall in some areas, sellers might now be more accommodating than they have been in the last couple of years. That could mean more of a willingness to close below the asking price.

While buyers have an eye on recent interest rate changes, potential increases in rents should also be taken into account. Realtor.com predicts that rents will increase by 6.3% this year, bringing the average to around $2,100 per month. With rents increasing faster than the historical average, the subsequent increase in monthly costs will most likely have tenants looking at the option to buy a house instead.

Keller Williams Real Estate Planner suggests looking at the total financial picture when assessing rent vs buy. Let’s consider a $1M property and work through both sets of numbers for buying vs renting.

Rent

The total cost of renting over a 30 year period is simply the monthly rent multiplied by the number of months. Then factor in an annual increase in rents (say 3%) and that’s the total cost.

In the example chart, monthly rent of $4,542 per month with an annual rent increase of 3% a year will cost a total of $1,636,806 over a 30 year period. Note that there is no equity generated in that time.

Buy

For the purchase, we’ll assume a deposit for $200K and a monthly mortgage payment equal to the rental amount above based on a 30 year fixed rate of 5.5%. Then, we’ll assume appreciation and market price increases of 4% a year.

While the total money spent is slightly higher for buy vs. rent, the striking difference is in the total equity built over the 30 years.

In addition to the equity you build up over time with a house purchase, also consider the other fundamental difference between renting and buying a property.

With a house purchase, you get complete control over the property so you can make the changes you want. If you want to paint the kitchen bright yellow or knock out that wall in the bedroom? Go ahead.

A house purchase also comes with a greater sense of stability. While a landlord can sell the property or change the terms of the lease, once a house is bought, the only entity that can take it away is the bank (if mortgage payments are not made).

In summary, always consider the full financial picture and your own financial goals when it comes to renting vs buying. Simply comparing the monthly rent with the equivalent mortgage payment does not tell the full story.

Here at Ultra Mortgage, we can guide you to find ways of finding the lower rates in the market. For example, there are alternative products that will allow you to purchase a property even with foreclosures or bankruptcies on your credit. In addition, we currently have the most competitive rates for jumbo and high balance loans.

Bill Maguire