Rent Or Buy?
Renting offers flexibility that owning doesn’t, and vice versa. If you rent, you’re often tied to a restrictive lease that prevents you from making changes to the property. You’re living for the man, and ownership is something that you reserve for the contents of your apartment or rented house. Depending on where you are in your journey through life, renting may be your best case scenario, but to build long-term wealth, owning is where it’s at. When you own, you write your ticket, unless of course you own where there’s a Home Owner’s Association, but that’s a different topic for a different day.
A crude method of determining the cost of living, in Scottsdale, for example, is to look at the price per square foot that homes are both renting for, and selling for. Right now, the average rental price per square foot when tested against rentals in the $600 – $1200/month range is sitting at $0.96/Foot. That means that, depending on the amenities, you would be renting a 900 sq/ft apartment for about $850-$900.
The average price per square foot for homes that have sold in Scottsdale that were priced no higher than $150,000 is at $112.59 per foot. The reason I use $150,000 is because that’s a reasonable starting price range for a first-time home buyer.
At $112.59, that 900 square foot apartment you rented for $850-$900/month would bring a price of about $100,000. For the sake of this comparison, let’s bump that up to $150,000 since in Scottsdale, that is at the low end of the spectrum and would probably only get you into a town-home or condominium, not a single family detached home. But that’s the caliber of property that most people are renting in that price range anyway.
With a moderate or better credit score, and a purchase price of $150,000 on a house, you’re looking at a monthly mortgage and interest payment of about $871.00, and over time, about 47% of your payment becomes equity. That’s automatic savings with annual property appreciation. That means that every month, part of your payment is actually going into your house, which you’ll later be able to recover if and when you sell.
So, $850-$900 per month to rent, or…well, just about the same amount of money per month to own, with equity added every month. Which sounds better to you?
So what’s the limiting factor? Why wouldn’t everyone and their brother, mother, and pet hamster be out looking to better their long term financial future?
Answer: No down payment.
Many renters simply don’t have it. And it’s not just renters who don’t have it. A majority of the nation doesn’t have more than $2000.00 in savings. The myriad of problems that in itself causes is far greater than the problem of determining whether or not to rent or buy.
But, what would it take, in terms of cash, to move from renting to owning?
For a $150,000 property, if you took out an FHA insured mortgage with 3.5% down, you would pay the following:
Appraisal: Approx $400.00
Inspection (Optional): Approx $400.00
These are the bare minimum fees, and all other fees associated with buying are negotiable and can be worked out through the loan structure with your lender, or striking a deal with the seller.
Don’t have the downpayment? Start planning. The amount above represents only $500/month saved for a year, or $250/month saved for 2 years…or if you’re patient, spend 3 years saving $168.00/month.
Eventually you’ll have it, if you want it badly enough, and then you can join the rest of the wealth-building nation and start planning for a bright, fun-filled future.