Renting vs Buying a Home — a Side by Side Comparison

The decision to keep renting or to buy a home is one of the most significant decisions adults will make in a lifetime. As we currently face one of the most challenging times in housing history, deciding whether to do one or the other seems even more complex.



The younger generation looking to move out of the family home for the first time is finding themselves with shockingly high rents and housing prices. So what to do?

If it is within your reach, even if you stretch your budget, consider the following items as you decide whether to rent or buy.

Factors to Consider When Making a Buy vs Rent Comparison

Home Prices

There has been a steady rise in home prices for nearly a decade and an explosion in the last 24 months. Most metropolitan areas have seen home prices rise as much in the last two years as in the previous six.

Areas such as Southern California, Phoenix, AZ, Jacksonville Fl. and many others have seen home prices shoot up as much as 20% in the last 12 months.

Areas with such high appreciation may not be the best option to buy a home in if you are just starting out. There are a couple of reasons for this: First, real estate may be overvalued in some areas, and buying a home at artificially inflated prices is not a prudent move. Second, mortgage rates have recently shot up as well, making it even more difficult to buy a home.

Rental Prices

The other factor to weigh against the cost of buying a home is paying the market rental prices in your area. Rental rates have also gone up considerably in some of the same areas where real estate prices have gone up dramatically.

You may have to determine whether you will still benefit from buying, even if prices are high, because the alternative, paying high rents, is not that much more attractive.

If you are facing both high home prices and high rent prices, the best approach is to make a comparison of the dollar-for-dollar cost of renting vs. buying.

How Long You Plan to Be in Your Next Home

This is a very significant part of the decision. If you plan to only be in your next home for a short time, renting may be a better option. The reason is that the costs associated with buying and selling are hard to recuperate on short-term purchases.

At a normal appreciation rate, it will take 2-3 years to recapture the cost of buying and selling a home, along with the difference in making a house payment vs. just renting.

Should You Wait to Buy in the near Future?

This is a question that a lot of people are asking themselves right now. There is a growing conversation about an imminent housing correction. Considering whether to wait or buy now is a legitimate consideration to hedge against a drop in home values if you buy now.

Mortgage rates are bouncing up and down, what if they drop even more? We recently saw interest rates double in less than 12 months, only to dip down a whole one percent in the following 30 days. With this volatility in the market, it is only reasonable to speculate that rates may drop even more, along with housing prices.

Side-by-Side Comparisons

To help illustrate the difference in dollars between renting and buying, let’s look at a couple of examples.

Scenario 1

A single person with a high-earning job in an industry with strong demand and great potential for stability. The property is a single-family residence with a purchase price of $750,000. The analysis will be a comparison of renting vs. buying over a five-year period.

Rental Information

Monthly Rent$3,500Annual Rent Increase6%

 

Home Purchase Information

Purchase Price$750,000Down Payment$75,000
Loan Amount$675,000Closing Costs$35,000
Interest Rate5.25%PMI0.75%
Annual Property Taxes1.2%Annual Homeowners insurance$1,500
Annual Maintenance$2,500Annual Appreciation Rate6%

The above scenario is quite typical in high cost areas across our nation. Here is what it would look like comparing renting vs. buying over a five-year period:

  1. If you were to pay $3500.00 per month for rent, and the average rental payment increase was 6.000%, you would pay $236,757.90 in a 5 year period toward rent.
  2. If you purchased a home and borrowed $675000.00 with a 5.250% interest rate, and you paid $2500.00 every year toward its maintenance, you would pay $283,955.00 in a 5 year period toward housing payments, including your taxes and insurance.

When you consider your tax benefits and the appreciation of your home, however, you will actually SAVE money by purchasing a home.

If your home shows an annual appreciation of 6.000% and your selling cost is 6.000%, your house value in five years will be $1,003,669.18. As a result, your total home purchase benefit will amount to $277,242.89 compared to renting a house.

Scenario 2

Now let’s take a look at a side-by-side comparison using the national median home price of $440,300 and the average monthly rental $2,495.

Rental Information

Monthly Rent$2,495Annual Rent Increase6%

 

Home Purchase Information

Purchase Price$440.300Down Payment$44,000
Loan Amount$396,300Closing Costs$25,000
Interest Rate5.25%PMI.75%
Annual Property Taxes1.2%Annual Homeowners Insurance$1,200
Annual Maintenance$2,500Annual Appreciation Rate6%

 

  1. If you were to pay $2495.00 per month for rent, and the average rental payment increase was 6.000%, you would pay $168,774.56 in a five year period toward rent.
  2. If you purchased a home instead and borrowed $396300.00 with a 5.250% interest rate, and you paid $2500.00 every year toward its maintenance, you would pay $186,664.25 in a five year period towards housing.

When you consider your tax benefits and the appreciation of your home, however, you will actually SAVE money by purchasing a home.

If your home shows an annual appreciation of 6.000% and your selling cost is 6.000%, your house appreciation value will be $589,220.72. As a result, your total home purchase benefit will amount to $178,359.77 compared to renting.

Conclusion

Looking at the dollars and cents analysis, there is a compelling argument in favor of buying vs. renting. A facts-based comparison indicates that purchasing a home is more financially advantageous than renting. Every area is different, though: home prices, rents, and your income will be different than our two examples.

To make the most informed decision about whether you should rent or buy, talk to experienced professionals who can give you a customized analysis for your specific situation.

Sources

  1. Rental Prices: https://www.cnbc.com/2022/08/02/rent-prices-are-soaring-in-these-5-metros-what-to-know-before-moving-.html
  2. National Home Prices: https://fred.stlouisfed.org/series/MSPUS


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