Friday, January 9, 2009

NORTHWEST AUSTIN HOMES: Should I Buy or Rent?

NORTHWEST AUSTIN HOMES: First Time Home buyers occasionally ask me if it is a better time to rent a house or buy a house. Well, often times in the past the answer is to buy because home prices are steadily increasing each year making your purchase a solid investment. Does that still ring true today?

There are plenty of factors that could influence a potential buyers decision like this such as consistent monthly income, credit score, $ put away for a down payment, and how long they could see themselves living in the area. I am not going to go into all of those details but I thought it would be good to look at actual sales and lease data from the MLS and crunch the numbers to see what the difference between buying and renting would actually be.

To do this I searched in the MLS for homes that are available within certain parameters. I searched within areas that I live in and work with buyers and sellers quite a bit because I have seen a good amount of the homes around there.

My Search Criteria was:

-Hunters Chase Subdivision Houses or Milwood Subdivision Houses

- ~2000 square feet

-Homes with three or four bedrooms


I looked through the data and found that there are homes that are listed in that area in the $175,000 to $190,000 range and similar homes lease in that area for $1300-$1400. So...Which is a better deal?

Well, lets look at each scenario:

Scenario 1: A House for Lease in Northwest Austin:

Lets say the lease is going for $1350. For the first year you will pay $1350 per month as well as renters insurance (~25/month) 1st year total: $16,500.

After the first year, the landlord has the option to raise the lease amount if you choose to stay. For this example, lets say they raise the lease $50 to $1400. The total spent on your lease and renters insurance for the second year would be: $17,100.

So, the longer a person leases a home, the rent could go up $500/year.

Scenario 2: A House for Sale in Northwest Austin:

Lets say that you and your REALTOR are able to negotiate a purchase of a house for $180,000.

First, we need to calculate your PITI. Wait, what's that? That is a term that is an acronym for the breakdown of your monthly payment that consists of:

P- Principal, I- Interest, T- Taxes, I- Insurance

I am going to calculate an example based on 3% down which would be the minimum down payment for an FHA Loan, and an interest rate of 5% (which at this point, some would qualify for a bit lower than that.

The Principal and Interest would be $937.29, the taxes would be $365 per month and the insurance would be ~$75/month which comes to a grand total of: $1377.29 The total after one year would be: $16,527.48. The financing and interest rate is locked for each year after that so your payment wouldn't change the next year or any year after that. (Taxes could raise slightly as time goes on with property values)

Result:

The difference in the first year is less than $30. That is pretty amazing! In this case, it looks as though buying would be the smarter decision. Why?

-You would have a locked in interest rate and your monthly and yearly payments would remain consistent over time.

-A home owner has greater tax advantages than a renter to offset income when it is time for tax season.

-The money you put into a home is something that works more as an investment than renting. Renting a house is like paying for a service. There is absolutely no opportunity to get any money back that you have paid to a landlord for a lease. Whereas, a property's value can raise over time and when you sell your home, you could receive your money back and a sizable return on your investment as well.

There are a variety of situations and a person's financial snapshot could provide different results. If you are interested in the possibility of purchasing a property, contact me and I will help you weigh the pros and cons of renting vs. buying in your situation.

Posted by Brian W Martin. Brian is a Northwest Austin REALTOR for The Pinnacle Group of Keller Williams who enjoys working with First Time Home Buyers of Residential Real Estate. He is also a resident REALTOR in Hunters Chase Austin, TX

2 comments:

  1. Hey Brian, great article about buying vs renting a Northwest Austin home. It looks like the low interest rates right now make renting seem even less appealing.

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  2. Thanks Garreth...
    I used 5.5% in my example but actual mortgage rates are much lower so you are correct that in my example it actually costs the renter more...even in the first year.

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