Renting Versus Buying

            OK, it’s a recession, longer than any we’ve experienced. Rumor has it that mortgages are harder to get. Banks aren’t lending. People are unemployed, or underemployed. So more people have decided to rent and wait until things get better. The question is: Are we there yet? Are prices still too high to buy? Is it cheaper to rent?

            First let’s talk about reasons to rent. There are some very valid reasons to rent rather than buy. One is timing: How long do you plan to live in a home or town? The longer that time period is, the more home buying becomes feasible. You have to be ready to put down some roots. If you are going to live somewhere for less than three years, you probably should just rent.

            As a builder I hate to say that, but the time it takes a home to appreciate to offset the fees and commissions associated with the buying process generally don’t pan out if you can’t love there for a few years. As an example, let’s say you buy a home for $150,000, live there for three years and then need to sell the home. You will list your home with a local reputable real estate agent and agree to pay a sales commission of 5-6%. If you only live in the home for two years, the house must appreciate 3% annually to offset the commission. So, generally speaking, plan on living in a home 3-5 years to make it financially viable.

            If you’re not willing to do a little maintenance, or pay someone else to do some maintenance, you may need to rent. Whether you rent or buy, the place you live in must be maintained. If you don’t want to be concerned with such issues, you should probably rent.

            If you have credit issues, you have to rent. And until you resolve those issues, that is where you’ll be. One way to repay your debts and fix your credit is to pretend you are buying already. Let’s say that you pay $750 each month in rent, but the home you wish to purchase would take $1000 each month. Save $1000 each month for housing. Pay your rent with the $750 and apply the $250 to paying old debt and fixing your credit.

            One of the fallacies in the rent vs. buying argument is size. Most people rent something much smaller than they buy; in fact the reason that many people move to buying a home is that they need more space. As an example, I know of some 1200 square foot townhomes here in town that rent for $750 month. So the cost of renting each month is $0.63 per square foot per month. I also know of a new home nearby, 1444 square feet for sale for $135,000. To finance that home 100% for 30 years at 4.75%, plus $146 each month for taxes and $40 each month for insurance would cost around $890 per month. The cost per square foot of renting that home is $0.62 per square foot per month, which is actually cheaper than renting the townhome!! And while over time the rent will go up, the principal and interest portion of the 30 year fixed loan can never change. What a hedge against inflation!

            I want to leave you with two quotes that I recently read in Bloomberg Business week. One is from Morris Davis, professor of real estate and urban land economics at the University of Wisconsin- Madison, who says “Now may be a once in a lifetime time to buy.” Richard Green, who is director of the Lusk Institute for Real Estate at the University of Southern California said that he was “hard-pressed to think of a time when owning on a cash flow basis looked so reasonable relative to renting.”  

            There are reasons to rent, many of them valid. If, however, you are ready to put down some roots, start building some equity and are willing to do a little maintenance, now is a great time to be buying a home.

            For over the past 40 years the staff at The Groce Companies has helped consumers in central North Carolina design, build and secure financing to build or buy their homes. If you need assistance, please call (919) 775-1497 and visit our web site, www.grocecompanies.com for more information.