A Home is a Home – Renting vs Buying
Originally posted at Ann Arbor Appraisal Blog
Real estate social media shows a constant narrative about the benefits of owning a property versus renting. This brief synopsis addresses how this is not always true.
In real estate, it is Location Location Location. What is true in one area may not be true in another, and renting is not always more expensive than owning.
Factors to Consider
So many articles that compare ownership versus renting costs do not account for the necessary set-asides that have to be factored into homeownership. They do not address the flexibility of renting; meaning that if someone is still in an upward career trajectory, they may not want to be tied down to a property. They do not factor in what could happen if markets change and prices move downward. Of course, values could continue to rise and rents could continue to increase, so each person considering owning versus renting needs to consider their own unique needs, as do the professionals assisting them.
To make a comparison, look at the most recent rentals within a series of condominium complexes, and compare them with the most recent sales. The data is segmented into three different unit sizes and uses the rental cost versus the cost of ownership with a 20% down payment and 4.5% interest rate. Many buyers are not going to have the 20% down payment, so the cost would be higher, as the loan payment would increase not only by the amount of the mortgage, but with the added cost of private mortgage insurance (PMI).
The above table shows rents between $1,400 and $1,700 per month. The yellow highlighted properties are the ones that are compared to cost of ownership, as there were sales of the same models available in the same period.
Cost of Home Ownership
The next chart shows the sales, with the stated homeowners association fees and monthly tax burden, plus what a 30-year, 4.5% interest rate mortgage at 80% loan to value would equate to. The “total” column is the mortgage plus taxes and HOA. Insurance is not factored in as it is variable. These stated taxes were largely incorrect however, as they were the seller’s taxes, not the taxes that the buyer would be paying once the property reset to the State Equalized Value as opposed to the lower Taxable Values.
Factoring in the reset to taxable values for the properties that were highlighted above shows a different scenario. In this scenario, the actual tax burden was added, plus a 10% set aside for repairs and upgrades, and a “true total” comparison made. Because the 1,126 sqft unit was renting for $1,500 per month, the difference is only $1 per month in savings. The 1,376 sqft units showed a better buffer of between $76 and $140 per month, but the larger 1,382 sqft unit would have been more expensive to purchase than rent.
It bears repeating that the data above factors 20% down payment, and not everyone who is looking at renting versus buying, has these resources. Not every situation is the same, and it is very important to look at each case individually to make comparisons between renting versus owning. Although national data can be enticing to make a case that one is better than another, it is not the case in every situation.
Consult your local professionals for advice related to what works best for your situation.
Rachel Massey, SRA, AI-RRS, IFA, CDEI is close to a life-long Ann Arbor area resident, attended the Ann Arbor public schools and the University of Michigan, and has a deep level of experience with this market. This knowledge goes beyond the A2 borders into Chelsea, Dexter, Saline, Manchester and Ypsilanti, as well as the lake areas in sourthern Livingston and eastern Jackson and northern Lenawee Counties. Rachel has broad experience with valuation for relocation, lake complexities, and with attorneys, as well as in-depth knowledge of mortgage review processes.