Is it better to BUY or RENT? There are pros and cons to both ideas. The best answer is ‘It Depends’.
As a rule of thumb – IF you know you’re going to live and work in the area for 2 years or longer – buying tends to be a better option. If you’re not sure or there are too many uncertainties right now – renting is the smarter choice.
Know the 5% RULE
The 5% rule is a simple analysis strategy that factors what is known as NON-RETURNABLE costs (i.e.rent for renters – things like repairs, taxes etc. for owners – costs that you will have, but can never recover.)
The short rule of thumb formula or concept here is if you take the VALUE of the home times 5% then divide it by 12 months. The figure that comes back is the cost per month you break even at for a RENT vs. BUY analyisis. IF you can rent the home for this figure or less, then renting is better and a better use of your money than buying. IF not, buying most likely will be a better use of your money over time. (The larger the spread between this figure and renting the stronger case for the buy decision will be)
EXAMPLE. If the homes estimated purchase price or market value = $250,000 you will multiply it by .05. This results in $12,500 as an annual cost of capital factor. Divide this figure by 12 months to get a monthly perspective. ($12,500 / 12 (The number of months in a year) = $1,04200). IF you can rent this home for this monthly rate or less, then RENTING is better economically for you. IF not, then the option of buying will most likely be a better choice.
The difference between this figure and the market rent will determine the strength of the BUYING OPTION. The bigger that spread the stronger the case for buying will be.
IF you can’t rent for this or buy for this then the housing market is out of balance – the house/rental is TOO expensive and you should move in with relatives.
NOTE: To give yourself a reasonable range run this figure using 3.5,4, and 5%. This will give you an acceptable range to work with. If the figures for RENT or PURCHASE are within these ranges you should have a better comfort level on your housing decision.
The following CASE STUDY highlights a young couple, in there early 20’s, who elected to BUY.
They purchased a 2 bedroom 1.75 bath town home in the Dixie Downs area of St. George in 2017. The list price then was $122,500. Rents for this type of town-home was between $950-1100 per month. Using the 5% rule they calculated a figure of $510.00 for the monthly cost of ownership versus renting at and average of $1000. They elected to buy. With their HOA cost they ended up paying about 675.00 per month.
This couple lived in the home for about 2 years. They paid $16,200 in mortgage and HOA costs over that time. They listed and sold the home for $155,900 with a cost of $7,795 in fees. So, with a sell price of $155,900 less $7,795 in fees to sell less the original cost of purchase of $122,500 they netted 25,605.00. This figure of $25,605 less the payments of $16,200 they made for 2 years they in a sense were paid $9,405 to live in the home. They got everything they put in plus $9,405 back. ($392/month plus FREE housing!)
Ownership worked well for this couple. Over time that figure tends to get stronger. Of course a good housing market made it possible for a short period to have very strong gains. The idea is at two years you break even.
As a team we’d like to help you look over your options and discuss how to possibly enjoy the benefits of ownership and what is known as the American Dream and take your highest monthly expense – HOUSING – and see how to recapture capital for you.