Mortgage rates are up, therefore home payments are up. Does it make sense to buy or should you rent? The answer is never as clear cut as you might think. Today I will sort through the issues and help you understand the best answer for you and your situation.
One of the questions we get quite often is a variation of “should I rent or should I buy?” The person asking will usually fill us in on some of the details of their situation which means our recommendations are not always the same. I spent more than half of my life so far thinking that it is never better to rent – always better to buy and build that equity. About 15 years ago I realized I had never challenged that assumption, but it took me a couple of years to get around to devising a way to evaluate the options. Even then, I did it only for my own situation, but I will tell you this: once I took a clear minded look at what it was actually costing me to live in my very nice house, I sold it in pretty short order. I’ve been a renter ever since.
I know it may surprise you to hear that the Flipping America guy is a renter. This is the sensible choice for me right now, both in terms of the financial realities I’m about to share with you AND a few of the intangible factors I will discuss today as well.
The important conclusion for you today is not a one-size-fits-all correct answer. My aim is to help you make an informed decision – one that could change as your life goes on.
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As I speak to you in early September 2022 the interest rate for a 30 year fixed-rate mortgage is 6.8%, more than double what it was one year ago. The median US home price is $428,700. A 5% down payment is $21,435, leaving a mortgage loan in the amount of 407,265.
Let’s assume $400/month for taxes and insurance.
At 6.8% the monthly principal and interest payment is: $2,655 requiring a monthly gross income of $9,500. Annual, $114,000. PITI: $3,055
At 3.4% the monthly principal and interest payment is: $1,806 requiring a monthly gross income of $6,450. Annual, $77,400. PITI: $2,206
Using the 28% rule. Why do we have this rule? Because people are idiots.
Average US income 2021: $79,000
This means that last year, the average US household could afford the average US house. Unless 2022 average incomes jump dramatically, that is no longer true.
Average house rent: $1,861
Average rent on $400,000 houses: $3,300
From a financial perspective:
On your $400,000 house you are going to replace HVAC every 15 years. Let’s say $5,000 in today’s prices. You will need a roof after about 20 years, and it will cost you $15,000. Figure another $100/month to cover it. You will have on-going maintenance and repairs which will cost 1-2% of your monthly payment over time. Add another $600 for that. We won’t even get into remodeling or expansion, but this is something a lot of people tend to do over time.
With on-going maintenance, management, and outlays for capital expenditures, owning a home takes significantly more out of your pocket each month than renting.
The first thing people say when responding to this, is yeah, but what about building equity? This is a good point we should consider.
Two sources of equity:
At a 3% annual rate of appreciation, in 10 years the house is worth $576,000
At a 5% annual rate of appreciation, in 10 years the house is worth $698,300.
The current rate of appreciation is around 10%, but I’m not even going to calculate that because it will not last. The market is not going to crash anytime soon, but the rate of appreciation is going to slow in 2023.
How to decide:
I can’t speak to the non-financial factors in your life. Only you can answer those questions, but if you look at your situation with honesty, realism, and clear communication with your significant other, you will be able to quantify the importance of these issues.
Here are some scenarios with my recommendations:
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Expected Air Date: Wed 9/7/2022
2022, Roger Blankenship
Mortgage rates are up, therefore home payments are up. Does it make sense to buy or should you rent? The answer is never as clear cut as you might think. Today I will sort through the issues and help you understand the best answer for you and your situation. One of the questions we get quite often is a variation of “should I rent or should I buy?” The person asking will usually fill us in on some of the details of their situation which means our recommendations are not always the same. I spent more than half of my life so far thinking that it is never better to rent – always better to buy and build that equity. About 15 years ago I realized I had never challenged that assumption, but it took me a couple of years to get around to devising a way to evaluate the options. Even then, I did it only for my own situation, but I will tell you this: once I took a clear minded look at what it was actually costing me to live in my very nice house, I sold it in pretty short order. I’ve been a renter ever since. I know it may surprise you to hear that the Flipping America guy is a renter. This is the sensible choice for me right now, both in terms of the financial realities I’m about to share with you AND a few of the intangible factors I will discuss today as well. The important conclusion for you today is not a one-size-fits-all correct answer. My aim is to help you make an informed decision – one that could change as your life goes on.
[0:00] Mortgage rates are up. Therefore, home payments are up.
Does it make sense to buy.
[0:38] Real estate. Wherever you are, whatever your situation, there is an opportunity for you and now, here’s that flipping America guy, Roger Blankenship. Thank you, Kathy Curtis. Hello, America.
One of the questions we get quite often is a variation of should I rent or should I buy.
The person asking will usually fill us in on some of the details of their situation which means our recommendations are not always the same.
[1:08] They’re variables that get introduced by life you know.
Well, I spent more than half of my life thinking that it’s never better to rent. It’s always better to buy and you know, build that equity. But about 15 or so years ago, I realized I had never challenged that assumption.
And it took me even there. It took me a couple of years to get around to devising a way to evaluate the options. It wasn’t really a burning pressing issue.
But I’ve been thinking about it for a while and so 1 day I sat down and I set up a spreadsheet model and look back at my expenses and my records for owning this home a home that I loved very much.
And you know, my son basically grew up there. My daughter’s didn’t get there, you know, when we moved there, my daughters were nearing the end of their,
Time at home but.
One side took a clear minded look at what it was actually costing me to live in this place,
I sold it pretty short order and I’ve been a renter ever since. Now, I know it may surprise you to hear that the flipping America guy is a renter.
This is the sensible choice for me right now in terms of the financial realities i’m about to share with you and a few of the intangible factors I will discuss today as well.
The important conclusion for you today is not to come up with a one size fits all correct answer rent versus buy I don’t think it exist my aim is to help you make an informed decision once it’s a decision that,
And just the deep you know the way life happens sometimes changes. Alright.
[3:08] We’re gonna get into all of that in a few minutes but I wanna let you know how you can reach us if you want to on Twitter and Instagram or at flipping America Facebook
Or real estate investing at notice how I say that it’s about real estate investing but also about just real estate
I don’t want you to be afraid to ask me your questions about that either, okay?
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[4:36] As i speak to you.
And the interest rate for a 30 year fixed rate loan is six. Eight% that’s the national average today six. Eight% this is more than doubled what it was a year ago,
The median US home price is 420 $28 thousand for $428700. Thank you. I can eventually read it right. It’s $428700.
If you wanna buy this home.
That’s going to be 21435 which is gonna leave a mortgage loan in the amount of $407265 now I don’t want you to get too
Caught up in all of these numbers and i know when someone’s reading a lot of numbers to you it can just kind of,
Mailed into the background and wake me up when it’s over but hang with me, alright? Stay here.
[5:39] In this scenario I’m setting up we’re we’re trying to help someone decide whether it’s best for them to rent or to own okay.
The sort of have our data in place to really
Be able to wrap her heads around what makes sense here we’ve got a $430 thousand house roughly and so let’s assume $400 a month for taxes and insurance because we don’t really know
Tax rates very widely.
The answer to their problems is to move to a state that has no state income tax. Well, let me tell you a little something about that. The states that have no state income tax have pretty high property taxes.
They’re gonna get you one way or another, but if you wanna move to a state with no income tax and be a renter, well, then you got that going for you. Anyway, so we’re just using a really rough average to come up here.
But but you do have to have taxes and insurance if you’re going you have to pay taxes and you do have to have insurance if you’re gonna borrow the money to buy a house.
Assume $400 a month. Alright, at six. Eight%, the monthly principal interest taxes and insurance payment.
And $55. It will require a household income of 114 1000. Now, a year ago when the rates were three. Four%, the monthly principal and interest payment,
The PITI would have been 2208 $100 a month cheaper requiring an annual salary of around 77400,
And and we came up with that annual sour.
[7:39] Generally speaking,
If you have to actually ever go somewhere,
Live well below your means and you will end up well,
Live well below your means and you will live well. Alright. So, why is this a rule? Why is there a 28% rule? The rule is actually set by the Fannie Maine Freddie Mac and the you know those federal,
Agencies that back home loans
Rather than live below their means and put aside money for savings people will buy all of the house they can afford.
[8:49] So we rather than teach people the true cost of ownership and let them make their own decisions and live with a consequences our government has decided to save us from ourselves,
Consumers but manufacturers started to create products that were,
Shall we say idiot proof,
It wasn’t me but I I like it and I said it for many years. As long as we continue to create.
[9:35] Idiot proof products.
Actually though it’s not the universe giving us bigger idiots it’s their own educational system,
Teach them how to set household budget. You would think that.
Training young people to go into the world of,
Anticipate what it cost to actually live and teach them how to live or teach them what a budget is and how to live on a budget and income and things like that to help them make better decisions but we don’t,
Why don’t we? Well, I guess right now, it’s because we’re too concerned to get the pronouns right.
It’s that’s relatively new. It’s always been something else. It’s been more important.
[10:44] By what they recently can afford they will buy everything they can’t afford in fact my wife and I play this little game at some of our gatherings where if you give me your address and a cup of minutes I’ll tell you how much you make.
I know that’s kinda spooky right?
Here’s how we do it. My wife is a title examiner and has access to all of the deed records in the state of Georgia. Now, that’s where we live. That’s where we do these meetings and that’s where we play this game. So, someone gives their address.
She can even on her phone go look up what they paid for the house when they bought it and we can sort of,
Extrapolate based on what we knew the interest home mortgage rates were then into a monthly payment and then we just divide that times. Two divide that by. 28 and we come up with.
The household income.
[11:37] And it takes a couple of minutes to do it but the mask not that complicated you just gotta do a little researching and then we say that.
And that gets them right up bumping up against the 28% rule okay,
In 2021 the average US income was $79 thousand that means that last year the average US household making the average income could afford the average US house.
Remember the average US house,
Was it is 428 1000.
[12:31] And in less 2022 average income jumps dramatically which I don’t see that happening and that is no longer true.
The average income in this country can no longer afford to buy the average house,
Between owning versus renting a little more interesting because you see
I did a little research. No, the average house rant in the United States is $1861 but,
Most of the rental housing houses in the United States are not $400 thousand house. So, I did little personal research
The average rent on $400 thousand houses just around in our area,
Okay that’s just on average.
[13:29] In 2021 when interest rates were at three. Four%,
P I T I that’s principal interest taxes and insurance payment of $2200.
Renting for 3300 that seem to kinda tilt in favor of the ownership.
Savings over the renters but wait you don’t you don’t achieve a savings at all,
You are now responsible for.
[14:27] You must maintain and repair the home if you are gonna stay there any length of time
If you don’t maintain and repair the home, they nearly gonna be a loser when it comes time, do you have to get rid of it?
Okay? So, on your $400 thousand house, you’re gonna need to replace the HVAC every 15 years
Ask for singles. You’re not gonna last that long. That’s gonna set you back $15 thousand. So,
Even as a homeowner when you’re looking at the cost of owning that home you should be
Sort of sinking a little bit of money into
That you can call future capital expenditures if you want or call it a Cap X account whatever you wanna call it you’re going to be
Replacing those things pretty much on the schedule you’re also gonna have ongoing maintenance you got a yard demo you’ve got fences that
Need repairs and gutters that.
Just constitute the normal part of home ownership. Now, we’re gonna take quick break and when we come back from that break, I will put it together in form of some numbers for you and it might have you thinking hmm.
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[16:35] With the ongoing maintenance management and outlays for future capital expenditors owning a home takes significantly more out of your pocket each month then renting and it maybe as much as a $1000,
More per month that you need to allow for all of these other expenses and this is another reason why you’re limited to 28% because.
You know, people in the know.
Things are gonna break and you’re gonna have to fix things and you need to, you know, also be able to buy food and clothing. Alright. So.
[17:12] The first thing people say when they hear me say this is yeah, but you know, what about building equity? That’s a great point and that’s what we’re gonna consider right now.
[17:22] There are two sources of building equity one is your mortgage pay down.
[17:27] Honestly on a 30 year mortgage it’s gonna take you 3 to 5 years to start really noticing any kind of equity growth from the mortgage paid out what you’re paying mostly in the first several years is interest,
That’s the way mortgages work flows you that don’t know this the payment is the same every month but it’s divided into a pay down of the interest and a pay down of the principal will they load it up so that,
The interest is mostly what you pay.
And I’ve got some video lessons where I illustrate that this but anyway it’s gonna take a few years before you really start.
Paying down your equity but appreciation is another factor and this is the wildcard here lately.
In the last couple of years home prices have appreciated in the double digit range like around 10%.
Whole valuation of appreciation important but also it’s going to be kind of.
Localize this not gonna allow me to give you a blanket answer but i will tell you this.
[18:43] We’re not gonna see double digit appreciation of homes going forward or for much longer.
Historically the annual rate of appreciation in the housing market is three%.
If we take the last few good years and we start to slow it down and think maybe we’re gonna be at a five% rate of appreciation for the next over the next 10 years,
That might be a number worth considering. So, here’s what I did.
I took our $428700 house and i appreciated it at three% over 10 years and 10 years that house will be worth 576 1000 so we just picked up about 150 1000 equity.
[19:22] Hey it’s a five% annual rate of appreciation the house will be worth around 700 1000,
So, you know, count on the three, hope for the five, in terms of appreciation. I didn’t even calculate 10%. Because,
That 10% is just not gonna last. And if it does, then you can come back and say, you know,
Hey Roger you were wrong and I will admit it but we are not going you know we’ve already continued double digit appreciation longer than I thought so and that’s since I have been wrong but I just,
Don’t see how I can continue to appreciate and it is already starting to slow down. Now,
Those are the financial factors that you have to consider. You have all of these additional cost of homeownership,
[20:17] The the fact is from a financial standpoint in the first 3 to 5 years it’s,
Really a trade off.
So you’re not quite as mobile.
[20:35] And that brings us to some thoughts about the non-financial factors so that I wanna cover the non-financial factors can often trump the financial factors where I think it may be probably for most people
Hey better decision would be to rent
5 or 700 dollars or a $1000 and put that into an investment account every month.
As if you were a homeowner paying roles since you’re gonna be far better off because most investment accounts are gonna do better than a three to five% appreciation okay.
That’s that’s generally true from a financial thing but now there are the let’s look at these non financial factors because you have to consider them factor number one children,
I know that children can grow up in apartments but I don’t know that I would wanna raise my children in departments. I grew up with a yard and my neighbors had yards and we ran back and forth into each other’s yards. I think it’s good.
To have a yard and parents that will make the children go get in them go outside get fresh air get a little bit of sunshine.
You know dig in some dirt do some things.
[21:56] That’s just my personal belief. But,
Children will become a factor and you there’s no qualification to the children. That factor is going to affect where you’re gonna live. Okay. Then there’s,
Number two, desire to put down roots and engage in the community. Some people really wanna do that. Okay.
[22:22] Then number three our hobbies are side gigs that require home ownership maybe you have to do certain things to the property that allow you to do this hobby or this side gig.
You’re not gonna get permission from a landlord who’s just gonna have to go back and change a bunch of stuff when you move out but if it’s your house, you can do what you want to with it, right? Okay. Four.
A lack of discipline to live below your means and save money that’s sort of a non-financial factor but if you look at your life and you say to yourself you know I just honestly don’t have the discipline to save money every month
I consider home ownership not an investment,
A sort of forced savings plan.
Because yeah, when it comes to the money that you spend, you’re gonna spend this about the same amount of money that you would renting over the years.
[23:20] You’re not gonna end up with any kind of a real investment that would compare with actual investments but,
That because of it’s lack of liquidity you couldn’t get your hands on it,
Aunt’s uncle’s in laws are elderly parents need you nearby and that can affect your decision to rent or buy and.
Number six last but certainly not least in the non financial factors,
You have ego.
You know, people respond differently to their own ego but really,
Person’s ego is certainly ego becomes a factor.
[24:31] If that i think the best thing you can do is just be honest with yourself about where your ego is and how it
Affects your decisions, okay? So, here’s how you decide. Now, I can’t speak to the non-financial factors in your life. Only you can answer those questions. Bye.
If you look at your situation with honesty, realism, and clear communication with your significant other. You will be able to quantify the importance of these issues. Here are some scenarios that I would recommend.
These are similar to a lot of the questions we’ve received. Okay, young married, children will eventually be in the mix.
Rent and save until the kids are ready to start school.
Do that rent and save thing. Then, buy a new house or one that is newly remodeled and stay there until the kids leave, you know, at least 20 years.
And then sell and get out before you have all those capital expenditures roof HVSC now
Because the house may need you know I may have a short life left on the roof and it may need some things if you if you’re not doing these things you may not get top dollar for the house but i don’t think it’ll be a dollar for dollar haircut.
So, yeah, keep that in mind. That that would be a dream scenario.
[25:54] Scenario number two. Upward, upwardly mobile professional, not likely to be in one location for more than 3 or 4 years. I think it almost always your answer is going to be to rent.
Rent and save 10% of your income each pay period putting into some type of investment account you’re just not gonna build up enough equity in a,
To 2015 and buy a house then or even 2018 and buy a house then,
It would be,
Okay. So, rent and save. A mid 30, adults with kids. Seeing the neighborhood going down. Wanna relocate to a better area, okay? Find that better area, buy a home there, and stay in it for at least 10 years.
When you have the the you know these kids are gonna be probably big enough that you’re not gonna wanna share an apartment with them,
Just being honest. Okay.
[26:58] Another situation. Empty next, empty nesters wanting to downsize. We get this a lot.
[27:07] And that this is very similar to my situation rent and turn that equity into passive income,
How do you do that? Well, that’s a individual decision but for me, it’s buying income producing properties.
That’s fine consider the ongoing costs of the maintenance and repairs and having the higher mower and more of the workout as time goes by but if you can afford that if your budget will allow.
To consider the fact that as god gives us,
Old age and a combination of results from all of the decisions that we make along the way and then look,
I referred to people who didn’t have much financial senses idiots.
I am talking to you as a person who has made every financial mistake in the book i have been a world class idiot.
I wasn’t trained.
It’s only if I’m talking to someone now who’s life has not turned out perfect and you might think well it’s too late for me to do anything about it now I’m just gonna live with you know the bad decisions I’ve made no.
Reject that thought.
You can maybe you won’t have the dream scenario but you can have a better scenario if you will turn around and start making some.
Better decisions more sound.
[29:00] Okay that’s all the time we had today I hope that you will stay in touch and send your questions to questions of flipping America. Net and I hope that you will let me know what you decide when it comes to renting or buying,
Here’s the Irish blessing of the day.
May the irish hills caress you may her lakes and rivers bless you may the luck of the irish and fold you and may the blessings of saint Patrick.
That’s it for today my friends.
[29:32] You’ve been listening to flipping America real estate investing for everyone. Listen three times a week on stations across the country or on the flipping America app,
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