Considerations for Renting vs. Buying

by Dec 6, 2019Financial Research

Intro

Trying to Decide Whether To Rent or Buy?

Did you know that mortgage interest rates are lower than they have ever been in recent time

Did you know your landlord has the right to raise your rent by 7.5% each year?

Do you know that you should save at least 20% of the value of your home to get a mortgage?

 

I’ve done some research on persons that live in Nigeria, California, Texas and other parts of the world and a majority of the videos and articles I’ve seen propose that renting is more attractive that buying. I encourage anybody making this decision to think about it in the context of the city and country in which you live, because the decision in New York City will be different from the decision in Falmouth. The reason why is because there are multiple factors to consider which are unique to your location – including the cost of housing, the expected rental costs, rent escalation rates, the mortgage rates and the amount you would be required to pay down to purchase a home.

 Working at Jamaica’s largest mortgage provider and personally transitioning from a renter to a buyer five years ago when I bought my first home has given me some insights into the calculation to make the decision, but before I get there I want you to consider some other factors: 

 

Lifestyle: Do you travel a lot? Do you have a family (or is your family expanding)? Are you creative and want to have the freedom to design your space? Do you like privacy? Are you financially responsible?

Legal: What are your rights as a Tenant vs your rights as a Home Owner?

 

Financial: Do you have high debt? Are you looking for an investment? Do you have a savings habit? Do you have a mortgage benefit or do you have NHT?

 

Some of the lifestyle considerations may affect your decision and push you straight towards rental or buying. If you have an expanding family and need to house them, but rental costs for an increased number of bedrooms exceed what the mortgage costs are, you could consider purchasing.

 If you move frequently or perhaps just started working renting may just always fit your lifestyle.

 

 

If you prefer to have more autonomy over your living space, then you may be inclined towards owning a home. If you don’t want to be subject to annual rental increases or subject to a notice to vacate OR if you want the freedom to rent your property out to other persons to make an income then you may also lean towards home ownership.

 

 So back to financial responsibility. If you have a high level of debt, it will be difficult for you to afford or even qualify for a mortgage. Consider debt consolidation or refinancing from NOW if you plan to buy a home in the next 5 – 7 years, especially if you have ever been behind on payments. Taking a mortgage is a huge financial responsibility. Do research and understand the task you are taking on before jumping into it.

 The habits that you will need to have as a homeowner can be developed from now through your discipline in savings. Investing in real estate is one of the steps towards wealth creation, but to get there you need to get over the hurdle of saving the 20% of the house value. Developing a savings habit leading up to the purchase is a good way to gauge your responsibility after you have gotten to the step of becoming ready to buy a house.

 

Take advantage of any benefits you have to make the purchase of the home outweigh the renting option. Remember in my article here that the difference between using NHT and not using NHT would translate to an additional $5.4 Million spent in interest payments over the 30 year life of the loan.

 In considering the opportunity costs to buy a home let’s first consider the upfront costs:

                                    One- two month’s rent as security deposit VS 20% of the Value of the House.

 

  A reminder that the fees related to own a home include the following:

 

 Visit my mortgage fee calculator here to estimate the fees related to purchasing a home. What monthly payments do we have to consider in home ownership vs renting?

Buying has a lot more to think about, but the good thing is that the 1st three are usually rolled up into one ‘mortgage’ payment. The savvy renter would consider getting content insurance for their property but this is not very common in Jamaica.

  

 

 Calculation of Rent vs Mortgage

 So let’s look at an example. If you are using NHT for a $15M loan, you would pay $88,717 as a single home owner and $73,631 as a joint applicant (see below). Without the NHT you would pay $103,803.

 

 Estimates of the total cost for two $15M properties for sale now are as follows. These are just estimates so the actual numbers may be more or less (especially the maintenance and repairs). As a joint homeowner, the mortgage and additional payments would be $102,631 monthly.

 

 

 

 

 This can be compared to the estimated $100,000 you would pay in rent for a new studio or an older 2 bedroom apartment. [1] BUT YOU CANNOT LOOK AT THIS IN ISOLATION. Even though the payments of the mortgage would be slightly more, over time your rent can raise and you are building equity in the home because of the relative stability of mortgage payments (for a fixed rate mortgage).

 

 

 I want you to take in what this graph is showing. The grey line is your income over time. I assumed that to get a $100,000 loan your income would have to be $300,000 (about 3x). The yellow line would be your rent increasing by 7.5% per annum (this hardly happens but remember your landlord has the right to do so). The orange line is assuming rent increases by about 3% (which is more typical). What do you notice? Over time, your rent is still remaining a large portion of your income, but for a fixed rate mortgage, the payment stays relatively LOW compared to your income. If inflation is lower than 4% (which the government is working hard to realize) then it gets even worse to rent if salaries stay relatively low as well.

So back to the example using the $15 M house:

Option A: You purchase a home and make a 10% down payment + additional sunk cost of 11% in fees. Sell in 10 years.

 Option B: You have 21% of the 15 million dollars ($3.15M) and you decided to invest it in the stock market for 10 years. Your stocks’ performance is reflective of the main index average annual performance over the past 10 years (about 15% per year). You continue to rent at $100,000 per month then sell the stocks in 10 years.

Assuming house prices increase by 6% p.a., inflation is 4%, rent costs increase by 3% and returns of 15%* if you had invested in the stock market, you would have a $1M advantage of buying over renting. Check the Rent vs Buying Calculator that I got from Khan Academy and modified with some Jamaican assumptions.  

BUT: Remember the financial consideration is only 1 out of 3. Over the long term, home ownership will generally win. The returns would be even larger if you can rent out a portion of your home to generate additional income.

Home ownership also wins in this example because of the fact that you are getting 15% on your money. If you are a very savvy investor and can generate returns in excess of 16.5%, each year then renting would actually work out to be a net benefit.

Also, if you purchase a fixer-upper or a house in pre-construction, the value could increase by more than 6%, adding further weight to the benefits of purchasing over renting.

A summary of the Advantages vs Disadvantages is as follows:

  Advantages Disadvantages
Home Ownership

–    More privacy

–    Build equity to provide a nest egg for the future (homes increase in value)

–    You can make modifications and customize it how you want it. More control over your living space

–    In some instances mortgages can be cheaper than renting

–    Mortgage payments usually more stable (Lower interest rates and housing initiatives make home ownership more accessible)

–    Long term financial commitment

–    You are responsible for all the maintenance

–    In most instances the mortgage is more than renting (especially if you have a roommate or other shared arrangement)

–    High upfront costs

–    Must pay taxes, insurance or maintenance (if you are in a strata)

–    Risk of foreclosure

–    Less mobility

Renting

–    Financial Flexibility (Shorter commitment)

–    Financial Stability (fewer unexpected expenses)

–    Career flexibility

–    May be cheaper than a mortgage esp if rent includes utilities

–    No maintenance and repair costs

–    No requirement to pay taxes, insurance or maintenance (if you are in a strata)

–    Possibility of living somewhere that you cannot afford to buy

–    Risks of instability higher (landlord can kick you out

–    No buildup of equity

–    Less freedom to customize your space

–    Possible restrictions on number of persons or pets

–    Rent increases more frequently than a mortgage would

 

 

https://www.vlarealtors.com/property/Crieffe-road-kingston-6-kingston-st.-andrew-MLS-25320

Details

Exploring The World.. One Data Point at a Time

 

USING DATA

TO MAKE DECISIONS

When you are trying to make a difficult financial decision, it is sometimes hard to access the right information in a way that is clear and easy to understand. 

There are troves of data out there to help you to make some of the most important financial decisions. 

Take The First Step In Navigating Your Life

The vision of this blog is to make some of that data a little easier to digest and find. Follow me on the journey there and I welcome and feedback or topics for exploration.

Get In Touch

Kingston, Jamaica

Email: researchsurveys1@gmail.com

 Twitter: @MsGillYJ