Owning Cost More Than Renting ~ Facts for Savvy Real Estate Investors in Houston TX
Owning Costs More than Renting
Facts are often known when both sides of the story are told. As Active Real Estate Investors, Builders, Developers & Mentors and Students of the Game now for 40 years, we work diligently to build our biz & enlighten others by exposing the REAL FACTS about being a “Professional Real Estate Investor”! In efforting to do so we often come across information that we find very informative and useful to our business which helps us develop our entry and exist strategies in an ever moving and changing industry.
Find below a recent article written by Erick Franks titled “Owning Cost More than Renting”. We feel that for the most part Erik is right on his facts and assumptions and wanted to share this article for those who are and/or are seeking to become “Professional Real Estate Investors” in the Greater Houston TX area.
We feel strongly this article and information validates strongly why so many hold investors today ( landlords ) are willing to pay so much more for homes than in the past. In the last several years we have seen hold investors willing to pay up to 80% – 90% of ARV(After Repair Value) in order to secure a deal. In times past most hold investors would usually not pay more than 70%-75% of ARV. This recent paradigm shift explains why Flippers (buy, renovate, sell) are at least to some degree struggling to find legit spread deals to execute on.entry strategies might work best and also enlightens them as to which acquisition and sale techniques to use as well in the Greater Houston TX area.
To Our Success!
Steve & Peggy Dancer
Owning Costs More than Renting
by Erik Franks
In most areas of the country, homeownership costs more than renting. Many economists with calculators claim the opposite, but the calculations and conclusions are often highly misleading. As is often the case, the devil is in the details.
We recently reviewed one highly publicized calculation that owning was cheaper than renting in almost all markets. That calculation had a number of outdated assumptions, including:
Outdated assumption #1: Buyers put down 20%.
In reality, own versus rent is a first-time buyer decision, and the vast majority of first-time buyers today make down payments of 10% or less.
Outdated assumption #2: Buyers are in a 25% tax bracket and thus save 25% of their interest payment in taxes.
Today, half of all home buyers obtain a mortgage less than the median resale price of $236K, and 100% of the annual interest on that mortgage is less than the standard itemized deduction of $12K per couple, so many entry-level buyers actually save ZERO dollars in taxes. Those that itemize likely only save a small percentage of the interest payment in taxes.
Outdated assumption #3: Future home price appreciation should be included in the own-versus-rent decision.
Most indices show that home prices have historically appreciated 1%–2% faster than incomes, but over a 30-year period of falling mortgage rates. Assuming you believe rates will rise or at least stay flat, price appreciation might be an aggressive assumption.
Don’t get me wrong. We believe homeownership is a great long-term investment for those with stable employment. It is just not less expensive than renting.
Not All Markets Are the Same
The premium homeowners pay to own versus rent varies across all cities. While the average US homeownership premium over renting is $146 per month, the premium varies widely:
In San Francisco, housing payments are over $2,500 more per month to own an entry-level home than to rent an apartment, which is also expensive. In San Jose, the gap is almost $1,800 per month!
In some markets in the Midwest and the Southeast, the monthly payments (excluding maintenance) are currently cheaper to own than rent. These areas are still extremely affordable, thanks to ultra-low mortgage rates and home prices that have increased over the past few years but not enough to return to their long-term average.
Below is a chart of major US markets and the premium it costs to own versus rent as seen through the eyes of most first-time buyers. We assume that the decision is between renting an apartment in a large apartment complex and buying a home valued at 80% of the median home price (a reasonable assumption for first-time buyers) with a 95% LTV loan.
Conclusion
Potential entry-level home buyers focus on saving a small down payment and affording the homeownership costs. They compare the monthly cost of renting to the monthly cost of owning, realizing that the owned home is usually much nicer than the rental and is thus more expensive. If owning were truly cheaper than renting, far more renters would be buying homes. Never forget that headlines can be misleading.
