What Are Your Clients’ Long-Term Objectives?
Buyer Mindset – Build Wealth
Renter Mindset – Avoid Hassle of Owning
How can numbers help you work with clients when discussing buying vs renting? Use the following example as a potential blueprint:
- $200,000 Property;
- $3000/yr taxes & $1800/yr Insurance;
- 3bd/2.1bath, 2 car garage, good schools;
Basically, desired by buyers and renters.
- Buyer qualifies for FHA and puts 3.5% down.
- Rent is $1500/month.
- All property attributes are updated and renovated.
Present Day Purchase vs. Rent
- Assuming 3.5% down, a 30 year fixed mortgage at 4.75%, the buyer owns the property for about $1607/month (inclusing PITI and MI).
- The owner has the option to pay extra toward the mortgage to increase equity.
Renter deposits first and last month’s rent of $3000.
At first glance, renting does appear to be an option, considering the current market conditions. However, how does renting affect long-term wealth?
As you discuss the pros and cons:
- “I’m saving more for a down payment”
- “I don’t want to spend the extra money on repairs”
- “It’s a bad time to buy with the market and all..”
Make sure the customer or client understands the trend of rentals.
- Rental rates have an average of 4% increase per year.
That being said using simple interest inflation:
- in 10 years, the rent payment will be about $2200
- After 15 years – about $2400month
- And finally after 30 years the rent will increase from $1500/month to about $3300/month.
- Given a rent that is $1500 and a mortgage payment that is $1607,
- assuming no increase in tax or insurance (a bold assumption, I know!),
- after year 2, the customer is paying more each month to rent ($1620) than to own ($1607).
- Further he/she misses out on tax deduction savings, ownership, and the opportunity to build wealth.
So, as you discuss options of renting vs buying with your customers/clients, incorporate accumulating wealth into your discussion. By showing them the numbers, hopefully they will see the definite benefit of owning vs paying 100% interest.
If they need a little extra push, sit down with them and a mortgage consultant to determine which is best for them now, and more importantly, in their future.