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# Is It Cheaper To Rent Or Buy

Diana Hill
Professional Real Estate Investor Instructor

You know one of the first things I’m going to say is that real estate is localized. So no matter how low interest rates are the location of the buy/rent question can be dramatically effected by the area you are looking at. However for this example we are going to use the national average.

What data is needed to do the calculation?

Rent – data is simple: monthly rent

Buy – data is more complicated: mortgage payment (30 year fixed rate loan with 20% down), maintenance, insurance, taxes, closing cost, and income tax deductions.

We will also assume living in the residence for seven years.  We won’t take into consideration home appreciation or rental increases.

With these factors taken into consideration (for the average community in the United States), buying remains cheaper than renting as long mortgage rates stay below 10.5%.

According to Freddie Mac at an interest rate of 3.9 % it is 41% cheaper to buy than rent. Even when the interest rate increases to 5% it is still 34% cheaper to buy than rent Nationally.

The interest tipping point will vary greatly because of area, however if you take out the west coast (including Hawaii) and New York/New Jersey areas 78 of the 100 largest metro areas had a tipping point of 10% interest or higher.  This means that in most places in the country interest rates have a long climb before it mathematically makes sense to rent over buy.

Because real estate is so localized finding your areas’ tipping point will be different.  There is a simpler way of figuring this out in your area – its called the “price-to-rent” ratio.  Take the cost of buying a home (the data needed would be price, points and closing cost) then divide that by the annual rent for a similar property. If the home price is cheaper than 20 times the rent this might be something to look into.  This is a very quick way of doing an analysis.

Example – An average 3 bedroom 2 bath home in the US sells for around \$165,000 and average rent would be \$800 a month.  165,000/ (800 * 12) = 17.18

So we’ve looked at this question mathematically but how about from a common sense perspective.

Advantages of buying:

• With a fixed rate mortgage the payment will always remain the same. Whereas rents will continue to increase somewhere between 2 to 4 percent a year.
• With an amortized loan you get closer each month to owning the home, which builds equity and wealth.  Whereas renting you are helping your landlord build his wealth.

Disadvantages of buying:

• You are responsible for the upkeep of the asset.
• Moving or changing your life style is harder.
• You must have a down payment and qualify for a loan.

The Homeownership rate is still dropping even with these low interest rates. The latest stats (when this article was written) were for the fourth Q of 2013 – the homeownership rate was at 65.2 percent which is .2 percent lower than the fourth Q of 2012.

All in all the math would show that it is better to buy if within your ability and all things being equal. But trust me, as a landlord myself I need renters to make money.  No matter how much things change in our culture and economy, people will always need shelter.

Great Fortune,

Diana Hill
dhill@tradingacademy.com

##### Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.