Your Home: Renting vs. buying

This week I was speaking with one of our clients who has been with us since the beginning of our real estate business. Now in my 13th year in the business, I greatly appreciate those who trusted me way back in the day when I was fresh out of the restaurant business and, frankly, didn’t know too much about real estate. This great client and her husband own about 30 rental properties in the Kansas City area.

I actually met them when in the late 1990s back when I was still working at Houston’s on the Plaza and was tired of renting apartments. I was referred to them through an apartment search company, and from the first meeting I knew we would be a good fit. Their properties were well maintained, cute, and in great locations. The funny thing is that my timing was just off enough that I never got to them fast enough. Every time I was ready to sign a lease, someone else had slid in just before me.

Although I never rented one of their properties, the relationship stayed intact. Fast forward to when I started my real estate business when I had a chance to reconnect with the great couple again. And now, I could be of service to them.

So back to my conversation earlier this week. The first rental of theirs that I looked at was in Fairway between 59th and 60th Streets on Buena Vista. It was a two-bedroom, one-full bath home on a crawl space. It did have a little bonus office space off to the side, but it was small. Probably around 800 square feet. At the time, it was renting for $895 a month. That same home today is renting for $1,200 a month. That is approximately at 30 percent increase.

The demand for apartments and home rentals is tremendous right now. Some attribute it to inflated real estate values. Some say that the low inventory of housing for sale has frustrated a lot of buyers to the point that they have just given up and rented. Or perhaps they just don’t want to compete with other buyers for the same home. Whatever the reason, there is no lack of renters out there.

But here is the part that I don’t understand. I just mentioned that the modest little home in Fairway is currently renting for $1200 a month. That same home would list for approximately $180,000 today. At a $180,000 sales price financed over 30 years with a five percent down payment ($9,000) at 4.25 percent interest rate, the mortgage payment would be $841.22 a month. This amount does not include taxes and insurance. But even if I estimate high taxes and insurance, in many cases the total mortgage payment would be less than $1,200 a month. So why rent?

In many cases, renters choose to rent because they have too much debt to be approved for a home loan. Or they lack the down payment required to make a home purchase. Some have not-so-great credit scores which affect their ability to obtain financing as well. Regardless of the reason, I would strongly urge the renters out there to create a plan that will get them on the path to home ownership.

Just this week the Fed once again raised its benchmark federal funds rate by 0.25 percent. Although this does not directly affect the interest rate that a consumer will pay on their home loan, it does indicate the tightening of the Feds monetary policy. Rising interest rates will have the greatest affect on many potential home buyers out there. As rates go up, affordability will slowly slip away.

Remember the scenario we mentioned earlier? With a 4.25 percent interest rate, the mortgage payment on that little Fairway home would be $841.22. If rates even go up 0.75 percent to 5 percent, that same little house would then have a mortgage of $917.96. The almost $80 difference may not seem like a big deal to some, but for a first time home buyer it can be a very big deal.

My message today is that if you or someone you care about is currently renting, please consider that the opportunity to purchase a home at a very affordable interest rate is slowly slipping away. The Fed has said that they will raise rates two more times in 2017. So the writing is on the wall. If you are facing one of the obstacles I mentioned earlier when it comes to buying a home, please reach out to a trusted Realtor to create a plan for your home buying future. If you would like more information about the steps to buying a home, please contact us today. We would love to help.

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