To Rent or Not to Rent

On the first episode of ____, Nick Starovic and Veronica Petry decided to rent in a new neighborhood before they decided to buy.  But, ultimately, owning their own home made the most sense.  Evaluating whether you should buy or rent is, in part a question of lifestyle.  Are you ready to be responsible for your own maintenance? Do you want the stability of knowing what your housing budget will be year after year? Can you afford to live in the part of town that has what you need whether that's commute time, quality schools or walkability? 

To evaluate the financial impact of the question, The New York Times has put together an interactive tool.  Use the button below to open the calculator in a new browser window then follow the tips below to assess your financial picture.

Home Price

Not sure what price home you may be interested in? Start by using the home finder below to search for properties for sale that are similar in location and condition as your current rental. 

Mortgage Details

Plan on a 30-year mortgage and estimate your down payment based on your current savings or plans in the coming years. If you hope to have a conventional mortgage, you'll need at least 5% of the sales price. For an FHA loan you can use as little as 3.5%.  

To determine what mortgage rate to use, check out these advertised rates online. (And consider adding 0.125% to be more realistic/conservative.)

The Future 

Let's look to historical growth rates to estimate the future, shall we? 

Home Price Growth Rate

Use this free service to search for the zip code you're targeting and get historical purchase facts.  Take a look at the Average Home Sale Price in that zip code over the past 5 - 7 years and calculate an annual average growth rate using this CNN Money Calculator. For example, in January 2016 the average home sale price in 77008 was $465,308 and in January 2009 it was $309,103.  That's an annual return of 6.3%.  

If you're looking for a general number for the Houston Metro, consider a Home Price growth rate of 6.0%.  

Rent Growth Rate

When trying to figure out the rent growth rate, it's important to consider that the near-term projections for rent in the Houston market have lost steam.  Credit the plethora of new apartment complexes upon which construction has recently or will soon complete.  Given the recent slow to just 1.1 percent in the second quarter of 2016, I'd recommend keeping this rate around 1.75%.  

Investment Return Rate

This one is all you.  Take a look at what your current savings are earning whether you've got your moola stashed in a savings account, CD, IRA, 401(k) or shoebox under your bed.  Estimate your annual return to include the lost interest on the money you have to pull from savings to cover your downpayment on a purchase. 

Inflation Rate

The Federal Reserve is shooting for a rate of 2%.  Let's just roll with that, shall we? 

Taxes

Property Tax Rate

Property taxes vary based on where you purchase. However, in the greater Houston Metro market, it's easy to find the rate by looking at a property for sale in the same subdivision you're interested in.  Just search for a property on HAR and then, once you click into the details, scroll down to find the breakdown for the total property tax rate.  If you plan to make this purchase your primary residence, you'll receive a tax break of approximately 20% for filing a Homestead protection on the property.  

For Houston properties within the municipality without business or other special taxing entities, the total tax rate is 2.5352%. With a homestead exemption, it's reasonable to estimate the property tax rate at 2.05%

Marginal Tax Rate

This is your effective tax rate.  If you don't already know your marginal tax rate, you can estimate it by using a calculator.

Closing Costs

So...this is where this calculator loses a little credibility.  Closing costs are not actually determined by the price of your home alone.  However, try these numbers to get an accurate estimate:

Costs of Buying a Home

Add $3,500 in closing costs to $2250 (15 months of insurance) and 3 months of taxes (homestead tax rate x purchase price x .25).  For example, on a $350,000 property in Houston the cost of buying the home would be:

$3500 closing costs + $2250 insurance + $1800 taxes ($350,000 x 2.05% x .25) = $7,550

Cost of Selling a Home

This is a little more straightforward.  Use 8.5% for an average price for commission payments to agents and make ready on the property.  

Maintenance and Fees

Maintenance and Renovation

This cost is going to vary based upon the age of the home you purchase.  But, generally, 1% is a good average.  If you buy a new home and plan to stay less than 10 years, you can likely reduce that number to .75% annually.

Homeowner's insurance

0.60% is a good starting number

Monthly Utilities

This is  a misleading title.  Rather than including your total utility bill, just put in the amount a landlord would cover if you rent.  For example, if you live an apartment and don't currently have a water bill, that's worth approximately $40.  If you're renting a Single Family Home and the landlord takes care of the yard maintenance, you should add $75 per month if you would hire your own landscaper.

Monthly Common Fees

Are you considering buying a condo, townhome or even single family property in a gated neighborhood or community with amenities such as a recreation center or playground? There will likely be an HOA fee.  If you are eying townhomes or patio homes in the inner loop estimate an extra $50 per month. Same if you are looking at master planned suburban communities. 

Common Fees Deduction

I'm not your tax advisor, so be sure you check with someone who is...but for the purposes of this exercise, just leave this as 0%.  It's unlikely this is going to apply to you and, if it does, probably won't make a huge difference.  

 Additional Renting Costs

Security Deposit

One month is common for the security deposit but you might also have pet deposits ranging from $250 - $500 per pet. But only include an amount here if you're going to be moving regardless (and trying to decide if you should own or rent your new place.)

Broker's Fee

If I work as your Real Estate Agent you won't pay a Broker's fee for renting nor buying.  So$0 it is!

Renter's Insurance

Hopefully you're paying this now.  Generally it will be less than $150 per year.

In Conclusion

What's your number? For our scenario to purchase a $350,000 home we would need to rent the same property for $720 per month or less to make renting a better financial choice.  That is not going to happen.  Not for the same quality and location of home.  What was your number? Fill out the form below and we'll schedule a consultation to talk about how to take YOU from renting to owning so you can stop wasting money on rent.

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