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October 26, 2014

BUY vs RENT

by derekespeer

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?

Future 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. 

Present Day:

  • 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.

Read more from Progression to Success

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