Renting Costs More Than Owning

renting-costs-more-than-buying.png 

USAToday published an article last week titled Housing Costs Punish Family Budgets. The article spoke of the costs of buying a home and taxes and the rising costs associated with home-ownership. It also discussed how many people are spending so much of their income on their mortgage payments and how that hurts these families.  Aside from the too-easy “Why didn’t you buy a house in your price-range” argument, let’s instead look at an article they published two days later, titled Housing Crunch Hits Renters Hard. This article discusses how rents have gone up so fast that many can’t afford to pay them and are being forced to move.

From USAToday

The home mortgage crisis has received far more notice, but experts say the ranks of renters with dire housing problems are growing faster than the ranks of defaulting homeowners.

The Center for Housing Policy reports that the number of working-family renters paying more than half their income for housing has soared from 1 million to 2.1 million since 1997. Overall, advocacy groups say there are 9 million low-income renter households and only 6.2 million units they can reasonably afford.”These people spend huge portions of their income on their housing,” said Sheila Crowley, president of the National Low Income Housing Coalition. “They don’t do things that we all would like to do — save money to buy a house, or for college or retirement. It’s a very day-to-day existence.”

So they create news about how it’s too much to buy and then a couple days later say it’s costing too much to rent. Contradictory, of course, but this is what the media does. So what is the reality about buying versus renting?

I live in Cottonwood Heights, a very nice area in the Salt Lake City valley, with “average” home prices around $450-$500,000. Whether that is a lot of money for a house is subjective and depends on where you live now and your point of view. People from Texas may think it’s way too much and others from California may think it’s dirt-cheap. But let’s look at the difference in renting and buying. To make things simpler and easier for me I chose (as always) to use examples closest to my house.

pinnacle-highland.png

There is a big apartment complex (photo above) a few blocks from my home called Pinnacle Highlands. This is the largest apartment complex in the valley and it’s a nice community. I called them today and was told their next available 2 bedroom apartment is available in November. It has about 950 square feet and comes with one covered parking space. No utilities are included, but the compex has a pool. This apartment costs $990/month.

Now let’s look at buying a condo in the area and compare. I did a search in the area for a 2 bedroom condo for below with at least 900 square feet and found a few, but chose one I think will work well for my example. It is located in Holladay, which is directly north of Cottonwood Heights and is considered very comparable in house values and stature. This condo has 2 bedrooms, 950 square feet and is priced at $124,000. The HOA fee is $195/month and that includes insurance, exterior maintanence, water, sewer, garbage and gas. The home comes with one covered parking space and the complex also has a pool.

mls-condo1.png

Total payment on this home with putting no money down should be around $990/month. And that would include all utilities except electricity. Both have the same square footage, one covered parking space, two bedrooms, and both are in good locations.

Difference is, after five years renting you would have gained nothing financially. In five years the condo will be worth $155,000, meaning the owner will have made $31,000 (of course this is my estimate based on my 14 years in real estate selling hundreds of homes in Salt Lake). Not only will the owner of this condo make $31,000 but they will have written off approximately $7000/year from their taxes, totaling about $35,000 in tax write-offs for the five years.

relax-in-your-own-home.png

So which is the better investment? Sure selling the condo, they may pay $11,600 in closing costs (6% commission plus other closing fees) meaning they walk away with only $19,400 and it may take them a few months to sell. But having over $19,000 cash and have written off $35,000 from my taxes, plus having the pride of ownership has got to be a lot better than having nothing. Fact is, renting cost more than buying when you factor in the lost financial gains. Obviously I’m not the first to point all this out, but if renters knew what I know- they would be owners, not renters- and that’s my whole point.

You want to know whether or not owning real estate is better than renting? Look at the wealthy- do they own or rent? People who have made a lot of money in this country very rarely have made it without investing in real estate. Have your money work for you through your investments- specifically through real estate.

Advertisements

5 thoughts on “Renting Costs More Than Owning

  1. I guess it all depends on your circumstances as to whether renting is right (more affordable) or buying is more affordable. Getting a job transfer, losing your job, a new neighbor is a drummer for the local punk rock band, your wife has just been diagnosed with twins or heaven forbid triplets and 2 bedrooms will not cut it in 2 years. If someone cannot afford 20% down in this economy, then renting is really the only sensible thing to do.

    One thing people need to realize…a house can be a home but it should never be considered an investment.

  2. Tim

    I couldn’t disagree more. Job transfer, losing your job, neighbor is a drummer, wife has twins or triplets- all those things can happen just as easily whether you live in an apartment or condo.

    You do not need ANY money down to buy a home, certainly not 20% down. We’ve represented about 60 buyers so far this year in buying a home- I guess maybe 20 of them had 20% down (people who had sold a home and put that much down on their new one), with the remaining buying with little or no money down.

    I bought my house with no money down, even though I could have easily put 20% down- but I took that money and invested in a rental that made me a lot of money.

    A house is an investment and it should absolutely be looked at as an investment. Anytime you spend hundreds of thousands of dollars on something you should look at it’s investment potential- not doing so would be foolish at best.

    I have made hundreds of thousands of dollars in my life from homes I have lived in appreciating (not even including rentals I have owned). Renting this whole time I would have nothing.

    Putting your money into an appreciating asset is the very definition of an investment…

  3. According to today’s paper, rents in the SFO Bay Area have increased 12%. Housing prices in most of the Bay Area are suffering downward pressures. It’s not the cost of the house as much as a question affordability.

    My guess would be that California is at an all time low for affordability. Though affordability is considered at a crisis point by the California Commissioner of Real Estate, the Governator’s attention is elsewhere.

  4. I agree that owning is better if you have any plans on living somewhere for a period of time. As far as prices going backwards, I don’t think we have much to worry about in the 1st and 2nd price tiers. It is the glutton of starter mansions in the south end of the valley that were over built, by speculators that did no homework AT ALL.
    The idea that the first two tiers are a pretty safe market is based on the makeup of Utah’s demographics. We are not going to run out of first time homebuyers any time soon. As long as we can keep the loan fraud out of the entry level we will be OK.
    DON’T LISTEN TO THE NATIONAL MEDIA. REAL ESTATE IS LOCAL IN NATURE

  5. Market factors need to play into this. I work in a market with declining values. I have more than one client who will pay up to 20K a month in rent because they are here on a short term basis (a few years). For them, it does not make sense to invest. I do recognize that my market is an unfortunate exception.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s