Should I Rent or Should I Buy?

For the Home · Read in 10 minutes 

Long term, there’s no doubt that buying is the better financial decision. However, the Rent vs. Buy question is very personal. The right answer for you today might be the opposite tomorrow. Rent vs. Buy is a moving target, which is appropriate, since we’re considering moving!

When to Rent

  • Credit scores or finances aren’t good or excellent
    • Unless you’re a cash buyer, you’ll need to qualify for mortgage financing.
    • Nowadays, mortgage lenders typically expect a 650 or higher credit score during this time of heightened caution against potentially-adverse lending practices. They’re playing it safe. Oh yeah, and be employed.
  • Not planning to stay put for a few years – and don’t want to be a landlord after moving
    • Mortgage payments don’t change over your 15 or 30 year loan term, but most of your first few years of payments go toward interest – not much against principal. So if you had low equity (i.e. low down payment) upon purchase, you’ll likely have low equity when going to sell if you sell within the first couple years.
    • There are fees to buy a house and there are fees to sell a house. Paying both sides of fees within a short time typically won’t reward you with a sizable profit – and sometimes can mean you, the Seller, bring money to closing. This depends on the price you paid, your loan balance, the price you’re selling at, the concessions you make to the Buyer, and the amount of Seller fees.
    • If you move but don’t sell, your house is vacant or you become a landlord. Getting renters to pay for your mortgage payment and a bit more can be a profitable decision long-term. But some people don’t want to mess with it, even if they know they can hire a local property manager – for which a real estate license is typically required.
  • Home prices falling dramatically and quickly
    • If your crystal ball shows you’ll be in your house for the next 20 years, I can almost guarantee you’ll realize a profit on the eventual sale of your home. However, no one has a (working) crystal ball. You just never know how long you’ll be in a specific house… But, you could own long-term, maybe as a landlord.
    • In stock investing, the saying is, “Don’t try to catch a falling knife.” In other words, if a stock is plummeting, it’s a fool’s game to try to guess the bottom and buy it before it shows signs of increasing. I’m not saying I completely agree with that for every person or every situation; I’m saying it’s a well-known aphorism. Stocks are very different from real estate – especially your home. It shouldn’t be viewed primarily as an investment – first and foremost, it’s a roof over your head. However, all things being equal, if you could buy the same house in the same condition for a lower price, do so. Thankfully, the Tulsa, Oklahoma area isn’t a “falling knife.”
  • Exorbitant home prices (i.e. at the peak)
    • Often, homebuyers enter the market, look around, see that others are paying certain prices for what they’re interested in, and so they do it too. Honestly, that’s called “the market,” and Sellers have less incentive to accept a lower-than-desired offer when they can reasonably expect that someone else will soon offer more. “Don’t try to catch a falling knife” (see above) is really saying “don’t try to time the market.”
    • Hindsight is 20-20, but, again, if you can buy the same house in the same condition, do so. The lower you purchase a house for, the less it has to appreciate for you to gain that amount of benefit.
    • If you really need to “purchase” in a recently-appreciated-very-quickly market, maybe look into finding a Seller willing to consider a lease purchase or rent with option to buy. Basically, a way to rent the house but maybe purchase it later if you want to. That way you don’t take the equity hit and you don’t have to move again. Plus, you get to “try on” the house and see if it fits.
  • Drastically increase interest rates
    • You and I don’t control interest rates – and even our American banks are affected by global economies and lending practices, which influence rates. But the single most valuable factor in the “home affordability” calculation is the interest rate.
    • Example: 30 year mortgage with $1,000 monthly principal and interest payment:
      • At 5% equates to a $186,281.62 loan amount
      • At 6% equates to a $166,791.61 loan amount
        • $19,490.01 (10.463%) less purchasing power simply because of a 6% instead of 5% rate
      • FYI: My favorite mortgage calculator: http://www.bretwhissel.net/amortization/ – it calculates for whichever field is left blank, which is ultra-convenient
    • Summary: The lower the interest rate, the more you can afford. If rates are expected to decrease dramatically, maybe it’s worth the 1-, 3-, or 6-month wait. Unfortunately, however, (just like high home prices) it typically takes a long time for significant rate reductions to come to market.

When to Buy – a.k.a. When to Contact End Zone Realty

  • You can qualify for mortgage financing (i.e. good credit scores, consistent employment, and whatever else the lender is looking for), you’re eligible to consider a traditional home purchase.
    • There are other ways to purchase, like rent-to-own (i.e. lease purchase) or lease option (rent but with option to buy within a period of time).
    • If you’re not a cash buyer and you cannot qualify for mortgage financing and you’re not interested in other alternatives, the decision has been made for you — Rent.
  • “I live here.”
    • If you’re ready to commit to owning for a few (or many) years, you’ve taken the first step toward home ownership – emotional commitment.
    • Just because you can afford a house (often via financing), doesn’t mean you should buy if you’re not committed to owning for a period of time.
    • When you say to yourself, “I live here,” now you’re looking for a home – not just a place to live.
  • Stable home prices
    • Ideally, you’d purchase after a housing bust – at the bottom – when prices are expected to continually rise. Maybe that’s now, maybe it’s not. Maybe it depends on the part of town. But if you want a house this year, that’s more of a determining factor of timing than waiting a year or a few years to “wait and see”.
    • “Wait and see” can turn into “I wish I had” – in a word, “regret”. Markets change, and their changes aren’t always evident until they’ve already happened.
  • “The One”
    • If you want that house at 123 Easy Street and the owner puts it up for sale, “waiting and seeing” about the market isn’t going to keep 123 Easy Street on the market.
    • A typical homeowner stays in their house approximately 3-5 years on average. Do you want to live at 123 Easy Street for 3, 5, or 20 years – or do you want someone else to?
    • “The One” is the culmination of timing, pricing, and location, location, location.
      • If 123 Easy Street is sold by Owner A in 2011 to Owner B (because you didn’t want to buy right now), you might not have the chance to buy 123 Easy Street for 3-5 years or longer.
      • By the time 123 Easy Street is back on the market, the original wood floors could have been replaced by Owner B. Or the backyard pool filled in. Or the house added onto. Or _____ – whatever those things were that made you want 123 Easy Street may not be around any longer.
      • Additionally, maybe maintenance became deferred or landscaping was neglected. Owner A may have been meticulous – someone you’d love to take ownership after. But Owner B may be the opposite.
      • Summary: “The One” is a package deal – and a moving target. If you’re not willing or able to get “The One” right now, we’ll work together to find “The Next One”.
  • Low or Rising Interest Rates
    • In the previous section, we saw how drastic a 5% to 6% change affects home affordability.
    • If you buy at 6%, that’s still a historically good mortgage rate. In the 1980s, rates were over 20% and people still had to live in homes and real estate was still a valuable asset class.
    • It’s like gasoline prices. If gas is $3.000/gallon today but the news says it’ll be $3.500/gallon tomorrow, the gas stations will be busy all night – even though gas was $2.750/gallon earlier in the week. Rising prices induces buying today. It gets people off the fence.
    • The point is: If you can buy today at a lower rate than if you could buy next month, quarter, or year – why not do it now? You’ll be in your home sooner, you’ll be able to afford more for the same amount of principal and interest payment, and, if your loan is assumable, you could have a nice incentive when you go to sell your home if market rates are considerably higher than yours.
  • Increasing Rent Rates
    • I started this entry specifically to show off this great chart and information source I found. I’m not sure how it ended up at the end, but all you folks that read through or skipped to the end get it.
    • Following is a chart of Quarterly measurements of Apartment Vacancy Rates from 2005 through the first quarter of 2011, with the Recession highlighted in darker blue. See the synopsis (with detailed numbers). One point that’s mentioned is: “Multi-family starts are increasing, and that will help both GDP and employment growth this year. These new starts will not be completed until 2012 at the earliest, so vacancy rates will probably decline all year.”
    • Lower Apartment Vacancy Rates results in higher rent rates or less concessions on rentals – a higher “Effective Rent Rate”
Apartment Vacancy Rate 2011 Q1 - cr4re.com

Apartment Vacancy Rate 2011 Q1 – cr4re.com

  • “Price-to-Rent” comparison shows it’s currently better to buy than rent
  • Here’s how to read the “Price-to-Rent” chart below:
    • The vertical blue bars are times of Recession
    • The blue and red lines are 2 different sources of housing price indices
    • The x-axis (horizontal axis) is the year
    • The y-axis (vertical axis – on far-left side) is the “Price-to-Rent” ratio. A value of 1.0 is just a reference point from January 1998 – to track comparisons over time.
Price-to-Rent Chart - February 2011 - cr4re.com

Price-to-Rent Chart – February 2011 – cr4re.com

 

Resources:

Rent vs Buy Calculators

  • NYTimes.com – awesome! – the best – the most fun (and there’s an Advanced tab if you want it)
  • Trulia.com – useful
  • REALTOR.com – detailed, including REALTOR® commission for selling
  • BankRate.com – qualitative (as opposed to quantitative) – also very strict opinions who should buy, based on affordability

Rent vs Buy Maps and Trends

Videos

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