Buy in hot market or pay high rent?

Question

Hey BP! So I have a question that I never thought I'd have. Recently I have relocated full-time to Tampa, FL. As many other places, the RE market is super hot. People are buying homes site-unseen and paying more than they appraise for. I am currently renting, and my lease is not up until April 2022.

In FL, there is no rent control. My current rent is around $1600, but I see on the complex's website that my apartment is now *starting* at around $2000. So in April, my rent could increase by $400. I don't like this possibility.

But I also don't like the thought of over-paying for a house. But at least the money would be going towards an asset rather than rent? There is a house I like that is going for $425K and I feel it's truly worth more like high $300s, but that doesn't matter because people will pay the asking price or more. I'm sure this house will be pending soon and that's ok because there's always another nice house.

What would you guys do? High rent or over-priced home?

Theresa Harris · Answer

If the market is selling them at $425K then that is the value at the moment.  When the market is hot it is hard to adjust what we think a house is worth vs what it is currently worth as we base it on the history.

I'd rather own than rent as it gives me more security.  Having said that if I was going to be moving around every couple of years, I didn't have the money for a down payment/couldn't get a mortgage for the amount of a home, I'd rent.  On a $400K mortgage, you'd be paying $1700 a month plus your property taxes.  Does the house have a suite or could you rent a room to decrease your living costs (the latter depends on if you'd want a roommate and not everyone does).

Ronald Allen Barney · Answer

Yes, sorry, I misspelled "Urban Centre".  To more fully disclose I was at Mosaic Westshore near the St. Pete causeway.  LOVED it there, didn't so much love what it cost relative to what I was making at the time.

The ad IIRC was for a house on St. Louis Ave., near Euclid, probably rented by now.  That whole area is lower end cost but not high crime at all.  Depending on what your needs are you should still see something affordable in that area.

Another thing you might want to look into is house hacking in that area.  The crazy prices might not allow the rent to fully pay for the mortgage but it can at least pay most of it.

Theresa Harris · Answer

It all depends on what happens to the market.  I bought in one area a few years ago and people were surprised at the price for houses.  Fast forward 5 years and they have kept increasing and are now not quite double.

20% vs 5% is a good question and depends on your goals.  If you think you will use the 15% difference to buy another property in the short term (ie you wouldn't have time to save it up), you might be better paying the PMI.  I've always put 20% down (on the two primary homes I've bought where I have that option) because the price for the insurance (I'm in Canada and terms may be different) ends up being more than the 15% by the time you are done.

Marc Rice · Answer

It sounds like you have time on your side - I wouldn't rush into buying something if you have until next year. Prices could soften over the winter and worst comes to worse you can just find another $1,600 rental for the time being somewhere else until you're ready. Just my $0.02

Jeremy Powers · Answer

@Nicole A.

A house is worth what people are willing to pay for it. If every house had a set price nothing would ever appreciate.

I just bought my first house and my new mortgage is less than my rent was.

The answer to your question is simple for me. Buy.

Jeffrey Donis · Answer

@Nicole A. Rental might be more flexible, and you can move if you need to. That's what I would do.

Bradley Dosch · Answer

I always vote for starting now rather than later. If you can find a house hack which significantly lowers your monthly living expenses, the cost of the home doesn't matter too much. Plus, if you hold on to it for 20-30 years, the purchase price also doesn't matter too much. Hope this helps Nicole!

Charles Renn · Answer

Hi @Nicole A.,

There is a lot of good feedback here. If I was to add anything, I'd say that according to some economists the strong housing market will continue for another year or so. I say this because that $400k+ house today will be worth another 5%+ next year before the market cools off.

Definitely check with local real estate professionals to get more accurate numbers, but in my example you'd gain about $20k in equity over the course of the year. Whereas renting, you could be paying an additional $400/month.

Another way to look at it is an estimated $400k mortgage is around $2,500. If you rent out a room, maybe you're paying less per month house hacking toward your mortgage than you're currently paying in rent..?

Hope this helps!

Scott Cheek · Answer

@Nicole A. I think you are going to get a wide range of opinions here because ultimately where and how you choose to live/invest can be a very personal decision and vary based on personal values, desired lifestyle, investment strategy, etc.  A few things to consider:

- How long do you plan on living in Tampa, in that particular neighborhood?  Personally, I don't mind renting as I view it as paying for convenience and mobility.

- Would the house serve as a good rental property if/when you choose to move?  Run the numbers based on it being a rental property - my preference is long term rental with the potential for short term rental being a bonus. The current cost of capital and inflation ahead are in your favor here.

- Could you take the money that would go towards a down payment on that house and invest it in a rental property that helps pay your rent?  Also keep in mind the additional tax benefits of this option and that the property pays for the expenses, taxes, insurance, etc, not you.

I like your approach in being proactive with your property manager and having a discussion.

Finally, and maybe most importantly, what would make you happy?

Ronald Allen Barney · Answer

One of the frustrations I had had with the Tampa market was that housing prices were sky high to buy relative to what you could get for renting them out.  As a wannabe investor that soured me on that market, but for someone looking for rental housing that's still good news in general.

Buy in hot market or pay high rent?

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