Buy or rent? It’s an eternal question made even harder lately by a) the crazy increases in real estate prices and b) the crazy increases in rents. Sometimes, it feels like you can’t win. But you can lose if you put blinders on and are unwilling to consider both possibilities. Maybe it would be worth checking out this great guide on selling rental property, as this may be able to help you make an easier decison and one that is a lot less stressful. On the plus side, there is plenty of money to be made from renting out properties. Of course, using a rental property management company would be the most efficient way of conducting business.
The folks at Grow recently asked me to explore this age-old question with the goal of showing people that conventional wisdom about home ownership being preferential… that renting is throwing away money … doesn’t really apply any longer. For several generations, buying a home was seen as an essential path to adulthood and old age. The Great Recession and the housing bubble pretty much burst that fantasy, and it shows. The fastest-growing segment of the housing market is single-family rentals.
That doesn’t mean renting is always the better choice, either. In a place like Seattle, where rents soared 12 percent last year, renters have to consider buying. Soaring rents are a reminder of the one benefit mortgages bring that has stood the test of time: predictable monthly payments that are not subject to a landlord’s whim.
Home ownership is subject to other whims, though: The whims of your hot water heater, or of your local town’s taxing authority. In fact, the buy vs. rent decision requires multi-variable analysis of the kind that Einstein would struggle with. Is it better to put a lot of money into a down payment on a home or into another investment? If you plan to stay only four years, should you rent? Not to mention the risks associated with losing earnest money, discovering unpermitted renovations, planning permissions, capital gains etc.
Fortunately, while researching this story, I found an amazing New York Times tool which allows you to enter all these variables into a calculator and generate a “break-even” point — above which the rent is too damn high and you should buy. From the story:
Let’s say you’re considering a $350,000 condo in a big city with $361 monthly fees, and you’ll stay for five years. You get a 30-year mortgage at 4.03 percent, pay $5,670 in property taxes and $14,000 for closing costs. You’ll pay $1,610 for homeowners insurance and 1 percent of the home’s value for repairs every year. The housing and rental markets each appreciate 3 percent a year.
In this case, the break-even point is $1,909 in monthly rent—meaning that if you can find a similar place for $1,800, all other things being equal, you should rent. If rent runs $2,000 or more, the sound financial move is to buy.
Over time, buying becomes the better deal. Stay for 10 years, and the break-even rent is $1,600. The reverse is also true: Sell within three, and the break-even jumps to $2,310.
I urge you to play around with the calculator and try several scenarios. Of course, no one can predict the future. Ask your friends, and you’ll hear dozens of them say something like, “I only planned to stay in this apartment a year, and now six years later…” So, there’s still unknowns if you are weighing a big buy vs. rent decision. Still, the more information you have when deciding, the better.
Click over to Grow to read more scenarios I’ve designed.
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