Should I Rent?
Should I Rent?
So many buyers are in a quandry over the past few months. Home mortgage rates have increased from 3.625 to 6.25% since January. Home prices have increased nearly 10% Since January. Every sign says a buyer should wait to buy a home.
Not so fast... It's very important to dig deep into the numbers and see where we were and where we are heading. Then, we can make a very educated decision to rent.... or not.
There are a few variables that come into play. Home prices, interest rates, inflation (and cost of living), institutional buyers, and rent rates.
Let's start with home prices. Home prices for the past 10 years have increased. In the past two years they have increased on steriods. What caused this? Low inventory and very low interest rates (helping buying power) helped buyers buy a home that was effectively overpriced. A home owner who owned a home was willing to buy at a premium because they just sold at a premium.
Interest Rate hikes have increased the amount per month a new home owner will pay on their new home. It also decreases buying power for the buyer. A 1% increase in interest means a 10% decrease in the amount a buyer is qualified for.
Institutional buyers have played a huge part in home prices going up. These companies are not worried about losing money and therefore are paying over listed priced. This is taking away inventory from home buyers...thus helping drive prices up. On the flip side...after a year of losing money on each deal they are realizing that a loss is not smart business and they are pulling out of the area... or changing their strategy to buy a home.
Let's talk about wild west of rental homes. First, there are less and less options for renters to find an affordable home to rent. Rental rates have increased drastically in the past two years leaving renters a very difficult challenge to find a place to live.
Since January 2021, Georgia rent prices have increased by about 22% per year. Georgia was ranked sixth in the nation for states with the highest rent increases.
According to the Tenant Protection Act of 2019, also known as AB 1482, landlords are allowed annual rent increases of 5% plus the percentage change in the cost of living (Consumer Price Index) per year, up to 10%. So tenants have some protection yet that's still a significant increase year over year.
Let's break down the numbers and decide if renting is best or buying is best -
Renting Benefits - 1. You get to move when you want. 2. When something is broken you call the landlord. 3. Rent rates are usually pretty consistent. 4. Someone else pays for termite control and trash pick up.
Rent Negatives - 1. The landlord could be very slow to fix items. 2. You are locked into 1 year minimum on the lease. 3. You are paying for someone else's mortgage. 4. You cannot write off rent. 5. You are not building equity. 6. Rent rates can potentially go up a lot.
Purchase Benefits - 1. You are paying your own mortgage and paying off the mortgage principal. 2. You are building equity. 3. You have certain tax write offs. 4. You know what your payment will be every month. 5. You can do upgrades/renovations if you want to. 6. Interest rates are expected to increase...so today is better than later. 7. Home appreciation - if you buy now you don't pay for a more expensive house.
Rent - Average rent rates are currently $1,850 per month for a 3/2 slab home. The projection is a 12% increase over the next 12 months. That is $2072 next year. $2320 after two years. (that's an increase of $2664 for second year and an additional $2976 the next year = $5664 in additional rent)
Purchase - If you purchase today the average home price is $300,000. Homes continue to go up in value. Let's just say for the sake of argument they stay the same or go down in value. The mortgage payment would be approx $1850 per month. and would remain that amount no matter the change in the market. And some of this payment will go toward principle balance of the loan amount therefore decreasing the amount owed...and the buyer can deduct all of the mortgage interest. Not only would you save the $5664 in additional rent (mentioned above), you will be able to write off the interest and pay down the principal balance