Real Estate Deal Analysis & Advice

Does It Make More Sense to Rent or Buy in Today’s Real Estate Market?

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5 Articles Written
House with "For Rent" sign in front

Being in real estate these days, it seems like the only question people want to ask me is, “Are we in a bubble?”

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The problem with that question is that there are great arguments on both sides. Anyone can pick a graph and quote things like historical trends or current supply versus demand and make a very convincing argument. While I don’t have a crystal ball, I do have concerns that we have approached the top of the cycle.

I see people I know stretching their budget, and I’ve noticed banks thinning their requirements just to get a name on a deed. It begs the question: Is now the right time to be doing this?

Is Buying or Renting a Better Idea in Today’s Real Estate Market?

Owning a home in this country is part of fulfilling the American Dream. It’s both a blessing and a curse. Buying that first home has become synonymous with “making it” in life. As such, it’s at the top of most people’s list of aspirations.

My husband and I have owned plenty of homes over the years and currently live in our potential “forever home.” At the same time, I know people who are very smart and successful investors who swear that renting a home is the way to go.

Related: To Rent or To Buy: A Complete Analysis for Prospective Homeowners

That brings me back to the current state of the market. If I believe that annual price appreciation is going to slow significantly or even stop, can I argue that these renters are wrong?

Happy property owners shaking hands with real estate broker after a deal. Young couple handshaking real estate agent after signing contract.

Buying vs. Renting: By the Numbers

As always when it comes to real estate, we decided to do the numbers. While we love our forever home, we are lucky enough to have access to investments that return 10 to 30 percent on our money, so the equity in our home could be doing a lot more. Obviously everyone’s situation is different, and the numbers can vary widely in different parts of the country. But here I’ve tried to use averages and historical data as much as possible. I will try not to overcomplicate it with things like tax deductions, etc., since once again that is situation-specific.

For easy numbers, let’s look at a $500,000 home.

Related: Should Real Estate Investors Sleep Soundly Despite Stock Market Scaries?

Expenses

Your biggest expense is obviously your mortgage. At a 4 percent interest rate, your payment would be about $1,900. Contrary to the popular argument that a mortgage is “paying yourself instead of the landlord,” about $1,350 of that is going to interest payments in the beginning. So disregarding principal payoff, your mortgage costs you about $1,350 a month.

  • Property insurance. Based on our experience with houses in this price range, insurance is about $150 a month.
  • Property taxes. Now here is the huge swing. A $500,000 house in our area costs you about $10,000 in taxes a year. If you live somewhere in the South, you just spit out your coffee—you are paying maybe half of that. In our experience with rental properties, the taxman is going to get you one way or another. For this example, to be fair we will go on the lower end and use $6,000 a year for property taxes. That gives us another $500 monthly expense.

That’s everything, right? All the rental property owners are laughing right now, because the constantly overlooked house expenses are repairs and capital expenditures. There are plenty of articles you can read about how much to set aside for these costs, but for repairs, CapEx, and ongoing maintenance, it is usually 1 to 2 percent of the value of the home per year. Therefore, a $500,000 home would cost you another $500 a month on average in upkeep and repairs.

house key in woman hand and green leaves background

Adding it up, we get:

  • $1,350 mortgage interest
  • $150 insurance
  • $500 property taxes
  • $500 for house expenses

This gives us a monthly total of about $2,500.

Funny how real estate numbers work isn’t it? While many of us like to use the 1 percent rule as a guideline on when to buy a rental property, it seems like 0.5 percent rule is pretty close in terms of a tipping point for when you should rent versus buy.

If you can find a house that rents for less than 0.5 percent of its value per month, then expense-wise you are most likely coming out ahead. By living in the Northeast (like me), renting is even easier to justify with double the property taxes.

The Bottom Line

So, what did we decide? Looking at rentals in our area, it was easy to find comparable properties to our current home that are renting for far less than 0.5 percent of the value. Plus, if we sell, we could invest all of the equity in our home and get returns much higher than we believe our home appreciation will get us. We both agreed that it made the most financial sense for us to sell our home and rent.

Will we actually do it? Probably not. I love our house, and I really can see our kids growing up in it. While the numbers determine most of the decisions we make in our lives, what is the point of being successful if you can’t spend some money enjoying it?

While I’m at it, I think I’ll get a quote on a pool.

What do you think? Is it smarter to buy or rent where you live? Where do you think the market is headed?

As always, I’d love to hear your comments.

Ashley Wilson, co-founder of HouseItLook LLC and Bar Down Investments LLC, started investing in real estate in 2010 with a single rental property. HouseItLook, located in the suburbs of Philadelphia, Penn., specializes in flipping early-1900s homes needing full-gut renovations. Bar Down Investments runs construction and asset management on large multifamily projects, while simultaneously offering investors opportunities to invest in real estate passively. Today, Ashley has overseen over $3 million in construction and completed over $36 million in transactions, including both single and multifamily real estate. Ashley has been featured on numerous podcasts, including episode 277 of the BiggerPockets Podcast, and was a contributor to BiggerPockets' Facebook Live.

    Isaac Agbolosoo Rental Property Investor from Grosse ile
    Replied 3 months ago
    Nice to have a foreever home, but not a good idea for those that wnat to be mobile.
    Debashish Sinha
    Replied 3 months ago
    Tbh, if you really have access to investments that return 10%-30% on a consistent long term basis, you've cracked a code no one else has. Take all the money in the world and put them in those investments.
    Len Bingham
    Replied 3 months ago
    I have investments that return 15%-25% consistently, like clockwork. You may need to do some more studying and open you eyes to alternative investments in addition to the simple investments you are paying someone to manage for you.
    Ashley Wilson Rental Property Investor from Radnor, PA
    Replied 3 months ago
    A few examples of more passive investments would be syndications, private equity/debt funds, direct lending, and mortgage notes. Currently, our apartment syndications project 15-20% returns, and we recently invested some SDIRA money in @Dave Van Horn note fund with 10% returns.
    Boris G. from Cleveland, Ohio
    Replied 3 months ago
    Yes, exactly
    Kimberly Green-Goldsborough
    Replied 3 months ago
    That’s what I hope to hear more about.
    Robert Martinez
    Replied 3 months ago
    It has been my experience that if you buy a house to live in as a forever home, it wont be long before the tables flip and your morgage will be far less than rent. You can then add a line of credit and put the money to work.
    Allen Cochrane from Smyrna, Georgia
    Replied 3 months ago
    IMO there are far too many considerations that must be factored into the RENT vs. BUY decision than can be covered in a brief, over generalized analysis. Below are a couple of excellent calculators (simple vs. much more detailed) which should help one make the better decision: SIMPLE: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html MUCH MORE DETAILED: https://michaelbluejay.com/house/rentvsbuy.html Also below is a link to set of answers on Quora for the question -- "What do economists think about buying vs renting a house?" https://www.quora.com/What-do-economists-think-about-buying-vs-renting-a-house
    Ashley Wilson Rental Property Investor from Radnor, PA
    Replied 3 months ago
    I completely agree Allen, I purposely tried to keep it as simple as possible to create a starting point and open a dialogue for others to make their own decisions. The main point I was trying to make was that in a housing market where you cannot guarantee house appreciation, it may make sense to consider the alternative.
    Matt Skog from Minneapolis, Minnesota
    Replied 3 months ago
    While not addressed in the article, lease optioning this "forever home" could well prove beneficial. Especially now, with interest rates on the rise. I think these "10-30 percent returns" the author experiences are cash on cash deals.
    Ashley Wilson Rental Property Investor from Radnor, PA
    Replied 3 months ago
    Good Point Matt. A lease-option could get close to the best of both worlds scenario and give you flexibility if there is some sort of market correction. Just be careful that the premiums you are paying above the current market rent aren't too high.
    Joann Gasper from Hereford, Arizona
    Replied 3 months ago
    Buying a home is not an investment. There is a big difference between purchasing something for an investment or personal use. The factors to be considered are not equivalent.
    Ashley Wilson Rental Property Investor from Radnor, PA
    Replied 3 months ago
    I agree Joann, however, everyone needs to live somewhere. It doesn't matter if it is deciding where to live, paying for my kids' education, or buying health insurance, I am the type of person who is always going to explore all the options to see what makes the most financial sense.
    Susan Maneck Investor from Jackson, Mississippi
    Replied 3 months ago
    As my mother always said, "Whether you rent or whether you buy, you pay for the space that you occupy." In Mississippi you definitely want to buy for 35-50K house rents for $800-$850. And 500K will buy you a mansion with acres of land.
    Ashley Wilson Rental Property Investor from Radnor, PA
    Replied 3 months ago
    Always location dependant... but maybe I should look into moving out there!
    Brendan LoCicero
    Replied 3 months ago
    What you say makes sense for where you live. In the Boise area where I live, appreciation is competitive with the return numbers you’re coming up with. It’s been that way for several years now. Demand far outstrips supply and is expected to for the foreseeable future. So I guess in the end it’s a regional thing.
    Ashley Wilson Rental Property Investor from Radnor, PA
    Replied 3 months ago
    For sure Brendan, there is no national real estate market. Every area is at a different spot on the curve, so if you believe your area is still going to see appreciation for the foreseeable future then buying a house becomes a lot more appealing.
    Erick Chavarria Rental Property Investor from Los Angeles, CA
    Replied 3 months ago
    This isn't taking account your tax deduction on all those RE taxes and interest. Which would most likely tip the balance in favor of owing your home. I live is Los Angeles where home prices are outrageous and I found a townhome that still makes more sense to buy vs. rent.
    Ashley Wilson Rental Property Investor from Radnor, PA
    Replied 3 months ago
    Unfortunately, there are a lot of factors that I had to leave out mainly due to their complexity. To your point, we found with the tax reform's new $10,000 cap it made our deductions for owning a home a lot less significant. I know a lot of people from California were hurt even worse than we were since they hit their cap before even factoring in their personal home deductions. Thankfully other tax changes were more kind to us.
    Kurt Alder from Panama City Beach, FL
    Replied 3 months ago
    Interesting article, thanks Ashley.
    Martin Foley
    Replied 3 months ago
    If you have investments returning as much as you say...and I don’t doubt it, what are those investments
    Martin Foley
    Replied 3 months ago
    I have a 3 family I bought for 350 4 years ago. It’s now worth 500. 119 year old building and maintenance is a killer. What should I do?
    Joseph Aragon Rental Property Investor from Plano, TX
    Replied 3 months ago
    Great short article! Life is more than numbers when it comes to family.
    Michael Casile
    Replied 3 months ago
    Good article. I feared that, based on the source, it was going to be buy-buy-buy. While I don't want to have a landlord (so I own) ... there are definitely times when renting makes the most sense. I do agree w/the earlier comment, if I could reliably get 30% returns on investments, I'd be renting, selling my children, etc. to generate investment income.
    Jerry M Cutrona Developer from Florida- Missouri
    Replied 3 months ago
    Ashley, Nice and concise presentation. Always buy low and SELL high! If you believe we are at a relative peak in the RE cycle, raise cash and find short term, liquid parking. It won't be too long before it will buy much more RE... How many here have been through more than 1 bubble? With all that said, a permanent homestead can be costly, but priceless indeed!
    Derrick Atkinson Investor from Philadelphia, Pennsylvania
    Replied 3 months ago
    Hello @Ashley Wilson, Great article, I am a licensed PA RE Agent, I own a duplex in the Philly area, working on my next investment but am seeming to be at bit of a stand still, I would love to hear more about your portfolio that is returning 10-30%, are you mostly investing in the Delaware county areas?, and do you belong to any of the local REIA’s in the area?
    Jon Shefsky Realtor from La Verne
    Replied 3 months ago
    Thank you for writing this article! Favorite part was towards the end when you explained the potential to sell you home and rent yet the value you will get from having a home for your kids to grow up in helped to make the decision to stay. Just another great example of how what works for some people may not work for others. 🤙🏻🤙🏻🤙🏻
    Don Taylor from Raleigh, NC
    Replied 3 months ago
    Great Article
    Cecile Poyet Rental Property Investor from San Francisco, CA
    Replied 3 months ago
    Thanks for the post Ashley. In markets like San Francisco, where I live, renting can make a lot of sense. I do want to do a deeper dive on the following sentence though: "We are lucky enough to have access to investments that return 10 to 30 percent on our money, so the equity in our home could be doing a lot more." Do you mind elaborating? This topic could deserve its own blog post!
    Kevin McGuire Rental Property Investor from Seattle, WA
    Replied 3 months ago
    Great article. It reinforces a concern I’ve always had with home ownership, which is that its lack of liquidity makes it a suboptimal investment vehicle. I can tomorrow buy or sell a rental property, but I still need to live somewhere and that reduces my ability to take advantage of market changes. I live in Seattle and have considered making this exact switch of selling my home, renting here, and taking the proceeds to invest elsewhere. “Live where you want and invest where it makes sense”. The cap rates are terrible in Seattle so I figure I should get someone else to take that risk. Put another way, Seattle isn’t my first choice for real estate investing, so why am I owning here? But moving disrupts your life and as you point out our criteria for our primary residence has many non-financial factors. So still I own. I recently took someone through a similar math as you did here but it was hard to get past, “but renting is throwing away money”. You have to, as you did here, talk in terms of the value of money plus total home ownership cost versus opportunity cost of that money applied elsewhere. It’s all left brain. Home ownership is right brain.
    Deanna Opgenort Rental Property Investor from San Diego, CA
    Replied 3 months ago
    Renting might be throwing $ away, but technically, so it paying mortgage interest. Rent where you want to live, invest where you can afford to invest. For me, that means I am 800 miles away from my rentals (though they are in the town where my parents live. It means tax-deductible visits to Mom & Dad , but Mom complains that I spend all my time on the rentals when I'm visiting LOL. They are landlords as well though, so they DO understand.