/thehomefax: follow the home fax weekly blog updating new posts on Monday and Wednesday from Nationwide Home Fax

Renting v. Buying - Fallacies and Perceptions


There is a growing notion, supported by articles, opinions, and supposedly relevant data, that renting is a wiser long-term option than buying. 

A couple common reasons people choose to rent opposed to own are: 

1) Location. You don't know how long you will be in the general area due to job changes, age, business ventures, and uncertainty of what you want, not to mention having and raising children.

2) Financial constraints. You may be a recent college graduate, have a smaller mean of income, or are not in a position to purchase a home and take the chance of costs associated with owning a home.

Although their are positive points and facts about the growing renters market, and some legitimate reasons why people should rent opposed to buy, many of these articles and points contain numerous fallacies about the positives of renting property opposed to owning property. 

Without getting into too much detail, as this could easily become convoluted, here some pieces of text and points from recent articles: 
  • If you could rent a $500,000 home for less than $2,083 a month (or $24,996 a year -- just under 5 percent of the home's value), renting is likely to be the best deal. If renting would cost more -- say 7 percent of the cost of buying, or $2,900 a month -- buying is likely to be the smarter economic choice, particularly when you factor in that rents are likely to increase over time.
  • Don’t overstate the benefits of buying. Many popular, free, online “buy-or-rent” calculators inflate the benefits of home buying. The study shows that calculators provide inaccurate guidance to more than 90 percent of renters considering whether to buy a home by overestimating tax benefits and underestimating the returns an individual can earn by investing.”
Explanations

  • Although there are somehow $500,000 homes on the market available for rent, when's the last time you or anyone else considered renting a $500,000 home? If you could rent a home for $2,083 a month, and don't live in New York City, I'd recommend buying any other home, anywhere. Maybe you even own a $500,000 home. That's great, but if you're an investor, you probably aren't going to wait 20 years to profit from your $500,000 property being rented at $24,996 a year. Here's a real situation that is more relevant to this rent to price ratio explanation. 
  • My fiance and I decided to rent a home in Metro-Detroit, MI from our landlord who purchased a foreclosure for $20,000 and invested approximately $2,500 into renovations, totaling $22,500.  We signed an 18 month (1 and 1/2 year) lease with a monthly rent payment of $900, which was $200 below the average rental price in the area at the time.  At the end of our 18 month lease, our rent payments totaled $16,200, leaving our landlord $6,300 short of his total investment.
  • Not only is this more relevant to the fact of how investors and landlords aim to recoup their investment as quickly as possible, but we practically donated $16,200 to someone over the course of 18 months, walking away never owning a single asset (the property) from our total investment. If our landlord structured the same deal, with a new set of tenants again, he would be in the profit by $9,900. Not a bad return on investment in 3 years, not to mention almost all income generated moving forward would be pure profit for the investor.  

  • On the same token, had we placed ourselves in the position of the investor, we would have been in the profit ourselves and not have lost $16,200 by renting the property.  Our total monthly mortgage payment, assuming 2.5% down, would have been $445/month.  From there, pretend your renting and put the extra $455/month back into the mortgage, that we've already budgeted for through our rental, and we're in the same exact position. 
  • Sure, there are property taxes, maintenance, and the sheer aspect of capital, but these had totaled less than $1,000 a year for the investor through the duration of our tenancy. Re-do the math, that's $7,900 our landlord would have profited from his total investment in 3 years. It doesn't take a convoluted buy or rent calculator to do this math. 

As stated above, there are opportunities and situations where renting is a wiser option than buying, and not every situation is the same or ideal compared to one or another. The important part is to make the best decision for yourself and others, based on comparable information and informed decisions, and as other groups, investors, agents, and articles have stated:

"We see far more opportunity to buy than we have capital," said Laurie Hawkes, president and COO of American Residential Properties, a Scottsdale, Arizona-based, single-family rental REIT in a September interview. "The fallacy is that the buying is over. It's not."


Anthony Flagg - CEO Nationwide Home Fax - www.NationwideHomeFax.com