The Hidden Costs of Renting

A long time ago, before I ever worked in mortgage finance, I moved 5 times in one year between apartments and friends’ homes.  I finally landed living with my Grandparents so I could finish school and afford my bills.  I struggled financially and was truly grateful for my Grandparents taking me in.  I finished school and later moved out shortly thereafter.  But all those moves taught me something valuable; renting and moving are expensive.

Granted, the average family is not moving 5 times in a year.  In fact, they may move once every year or two.  While my expenses added up much faster, it occurred to me that even the one move or continuing the rent cycle adds up overtime both in dollars actually spent and missed opportunity with rising interest rates and home value appreciation.

Convenience

Renting a home can be more convenient for a number a reasons; A Landlord takes care of major repairs, you are not committed to living there permanently, and sometimes it will be less expensive in the short term.  Yet, the same considerations for renting can translate into homeownership becoming a better option for convenience. 

As a homeowner, you are your own Landlord.  You will need to maintain your home.  But YOU maintain your home to YOUR standards, not sub-standards to save a couple bucks.  YOU control the level of work done with repairs and maintenance.  I have heard countless stories of how Landlords fixed a broken water heater or dishwasher with a used one as the replacement for the appliance to just give out on them a month later.  Another story involved a leaking roof that the landlord did not fix properly which later created black mold issues in the home.  While you are responsible for your home, the quality of life can be much better.

Rental Rates on the rise

According to an Inman article with CoreLogic data, rental rates increased 6.9% in 2018 in Phoenix and 3.1% Nationally due to job creation and limited supply for housing.  Phoenix is listed as one of the top markets for cost of living affordability and economic growth.  This means owning a home and/or buying a home in 2019 will still help you take advantage of an appreciating market when values increase. 

The housing demand is noticed locally in the Phoenix market with many new home projects underway.  That’s because both single-family homes and rentals are in such high demand for new families, growing families, college graduates, divorcees, and retirees.  Between rising rents, right-sizing and job growth, people are looking to fix their monthly expenses while leveraging wealth creation.

Looking at the Numbers

Let’s dig deeper at the numbers.  Take a 3 bed 2 bath single-family home valued at $250,000 in a neighborhood.  Rent is $1,600 per month.  Below are additional expenses:

Security Deposit: $500

Pet Deposit: $300 (if applicable)

First Month’s rent: $1,600

Moving: $1,500 – $3,000

Total: $3,900 – $5,400

Cost of Waiting

Your total cost of entry is nearly 75% of the down payment needed to purchase a home.  And, you “skip” a payment when the mortgage comes due.  When you try buying that home in a year or two, you will likely pay more for the home which will increase your cost of entry and the monthly payment due to rising rates and appreciation on the home’s value.  Appreciation occurs when the supply is lower than the demand.  Homes in this price point are hot in today’s market.  See below:

The chart above depicts the historical appreciation in Maricopa County.  The conclusion to consider is how much more you will pay for every year you decide to wait.  The appreciation of home values makes the cost of entry higher.  If rental rates are themselves expected to increase, why wouldn’t home values increase?  Remember, there is a supply and demand issue. 

Amortization is a way of spreading out the cost of something.  For housing, it means payments of money owned/borrowed (principle) and the cost of money (interest).

Looking at amortization (principle payments) and appreciation combined, you start to see how owning a home creates wealth.  The cart below depicts how overtime the money you are paying into a home works for you.  After year one, you would gain $15k in ownership.  This combines the money paid toward your principle and the equity gained.  In year two, that number doubles to $30k.  Paying $1,600 per month towards rent ($19,200 over 12-months) goes toward zero.

Summary

As a lender, it is obvious I am a proponent of homeownership.  Afterall, it’s my business.  I am not opposed to why someone will continue renting and in some cases, I may recommend that setup.  However, I wouldn’t be doing my job if I didn’t take the time to explore the numbers and overall breakdown of how and why homeownership is a better solution, even if the payment is a little higher than renting for the short term. 

Ultimately, any decision requires some emotional and rational thought process.  If you can afford a rent payment that equates to a mortgage payment, you are truly missing out on opportunity, even if it’s for the short term.

Chris Gonzalez
(480) 442-4494 | christopher@allwestern.com | All Western Mortgage

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