Mortgage Rates Are Lower Than Rents!

12 Replies

Looking at the Realtor.com's estimate for the properties in Jacksonville, it looks like the mortgage payment is lower than Rentometer's rent! 

For example, Zillow estimates one of its 90k properties to have payment for mortgage, insurance, and taxes at $500/mo. But Rentometer estimates the rent at around $750, which is so low it fails the 1% rule. The thing is, almost every property I've looked at in Jacksonville has a similar story. How could mortgage payments be so much lower than rents?

Why wouldn’t mortgage rates be lower than rent? If mortgage payment is not lower than rent, you will never meet 1% rule.

These numbers seem about standard across the board. Did the mortgage calculator include just property and interest? If so, that is leaving out property taxes, insurance, maintenance fees, capital expenditures, and property management fees, so that $250 dries up pretty quick. 

If I'm a Landlord and my mortgage is $1,000 a month, I have to rent at a higher rate to cover my expenses and try to cash flow. Therefore, it makes sense for rent to be higher than mortgage rates.

You are all right. I didn't communicate my question clearly. 

Here's my real question. If mortgage rates are so much lower than rents, why would anyone rent? Wouldn't it make more sense to pay $500/mo purchasing, and then selling when you move than $750/mo renting? 

A person may have to rent because their credit isn’t good enough to get a mortgage. Another scenario where renting would make more sense is if they’re only living in the town for a short period of time, like a doctor doing residency or a college student or a traveling construction crew.

look carefully at the calculators.

Some are just plain amortization, which makes it look really low. you need to add property tax, insurance , PMI etc to get the monthly payment. Mortgages usually escrow and pay for taxes and insurance, so don't be mislead by a simple calculator.

@Shafi Noss you have discovered the basic premise of real estate investing! I don't mean to be sarcastic, as at it's core that's what this forum of 1,000,000 members is here for....there is a profit margin on properly purchased investments. But it isn't a secret the renters don't know about. The thing is, as an investor, you are taking on all of the risk and responsibilities of each property. Renters like to pay one monthly housing bill and call you when the AC goes out or the roof leaks, and as an investor you plan to have reserves for those things. There is an infinite amount of money to be made in real estate, but ask anyone who leveraged to 100% on a huge portfolio in 2007, you can lose everything if you don't play the game right. A renter's only real risk is an increase in rent at end of lease term. It is on the back of this risk taken that investors make their money. They earn their living by taking calculated risks, build wealth, and renters get quiet enjoyment of their homes without a care in the world about the housing market, repairs, or property taxes. For many it isn't money keeping them from buying a house, they don't want to take the risk or hassle with it. Each side comes from a different position and get what they are looking for out of the landlord/tenant relationship. When you buy a car, you know everyone from the salesman to the truck driver delivering bolts makes some money, and you're happy with the product for the price. Same applies to landlord/tenant relations
Originally posted by @Shafi Noss :

You are all right. I didn't communicate my question clearly. 

Here's my real question. If mortgage rates are so much lower than rents, why would anyone rent? Wouldn't it make more sense to pay $500/mo purchasing, and then selling when you move than $750/mo renting? 

The economic calculation is actually to compare the cost of buying home + paying local tax and HOA to the cost of rent + income on investment of the upfront payment. Comparing mortgage payments to rent is nonetheless a very good proxy for that, and people who rent instead of buying when mortgage is so cheap are behaving suboptimally.

If you look to pay a rent of around 2k, you will see that you can get a house valued 350k, so that rent cost is getting much nearer of that of the mortgage. The reason is that 2k tenants have very good credit and can get a mortgage. Your argument makes sense for rents of $1000 and above, if you look at other countries where prices are less affordable or other decades when rates were very high, it was often the case that buying was more expensive. 

The situation is the way it is because households are still rebuilding their credit and rates are very low, and once credit is rebuilt the cost of owning can exceed that of renting, especially with higher mortgage rates.

The economics at $750 are different: the tenant pay does not have access to credit, he does not want to take care of a home and will let not fix leaks or change aircon filters. So buying is not for them.

The high crime and bad schools may weight on the potential appreciation of the house, and it is not such a obvious good deal for an investor given the tenant risk and the annual $3000 of capital reserves (roof/furnace/windows) one needs to put aside for any house that does not appreciate.

Originally posted by @Shafi Noss :

You are all right. I didn't communicate my question clearly. 

Here's my real question. If mortgage rates are so much lower than rents, why would anyone rent? Wouldn't it make more sense to pay $500/mo purchasing, and then selling when you move than $750/mo renting? 

well you aren't taking into account many other metrics that are important.

if you only think month-to-month cash payments, then yeah buying is cheaper.  but you're not considering:

selling a house costs a lot of money! (~8% of sales price)

if you want to 'turn around and sell' when you move, you have to hope you can do that quickly. houses are very illiquid

buying a house requires an evaluation of future potential appreciation

buying comes with a lot of overhead, the mortgage might be less than the rent, but the renter will never replace the roof

a mortgage means (in many cases) less flexibility

lots of reasons to rent rather than buy, in fact buying a house is a rather average-at-best investment all around.

Originally posted by @Shafi Noss :

You are all right. I didn't communicate my question clearly. 

Here's my real question. If mortgage rates are so much lower than rents, why would anyone rent? Wouldn't it make more sense to pay $500/mo purchasing, and then selling when you move than $750/mo renting? 

Here are the reasons:

1) This is just the mortgage and doesn't include taxes, insurance and maintenance charges. Some people don't want burden of maintaining properties

2) Some of these people don't even have cash for down payment as they live paycheck to paycheck and may have credit card debt

3) Their credit is not over 500/550 mark so may not even qualify for mortgage

4) People who move around a lot prefer to rent