The question plaguing every tenant who wants a home of their own is whether they should continue to rent or is it the right time to buy?
The combination of good prices and low mortgage rates make it considerably cheaper to own than rent in most markets. Assuming a person is qualified with a down payment and won't be moving for several years, there may not be a better time to buy a home.
In the example below, the total house payment is $1,281.01 compared to $1,500 to rent the same home. Before you consider any of the financial benefits attached to home ownership, it's cheaper to own than to rent.
The net cost of housing falls to $764 or just more than half the house payment when you consider the principal reduction due to normal amortization, a modest appreciation and the tax savings along with a reasonable maintenance expense that a tenant would not have to pay.
One of the biggest benefits is the growing equity. As the value goes up, the unpaid balance goes down. A favorable leverage causes their low down payment to grow to $40,609 in a short seven years based on a modest 1% appreciation.
There's an expression often heard in real estate circles: "Whether you rent or buy, you pay for the house you occupy." You're either buying it for yourself or you're helping the landlord buy it.
Check out a Rent vs. Own to see how your numbers will compare to this example or call me to do it for you.
Rental properties have four primary factors that contribute to a return on investment. Based on market conditions and investor strategies, the individual motivating factor can change for property owners.
There was a time when the benefit of tax savings to offset income from other sources was considered important to some investors. However, in today's environment, they are more likely valued as incidental benefits.
Some investors expect appreciation to deliver the satisfactory results which can be reasonable over time if a reliable appreciation rate is used. Savvy investors today are using conservative estimates for long-term holding periods.
Leverage occurs when borrowed funds are used to control a larger asset. Positive leverage can actually increase the yield on an investment.
The fourth component that contributes to a property's yield is the cash flow. When the rents are greater than the expenses of operating the property and servicing the debt, there is a positive cash flow. A property with a good cash flow doesn't have to go up in value to justify the investment.
The combination of lower prices, incredibly low mortgage rates and rising rents are attracting investors to rental properties that include single-family homes in predominantly owner-occupied neighborhoods.
Even if you were to ignore the benefits of tax savings, potential appreciation and leverage, the attractive cash flows make rental property a very smart investment alternative. If you're curious, contact me for more information.
