One of the largest decisions anyone makes is whether to purchase or rent a home. The answer is not always straight forward. Many factors are required to reach a financial solution: home price, rent, income tax rate, interest rate, property tax, duration of rent or ownership, other tax deductions that can be itemized, insurance, homeowner or condominium association costs and maintenance fees. Even then the bold assumption must be made regarding the availability and alternative investment opportunities of the down payment.
Good news is that GoBankingRates, for the second year in a row, has condensed this decision to just a few variables and completed all of the calculations allowing a quick economic decision. They utilized estimated typical rents by state as per Zillow – including single and non-single family properties. The methodology was simple and straight forward: compare rents from homes on the Zillow site to the monthly mortgage payment based on the median list price of homes assuming a 20 percent down loan using a 30-year fixed-rate loan.
Their finding for all 50 states and the District of Columbia are included in the following table. In most of the states buying was superior over renting for a total of 34 states. Renting was the preferred solution in 11 of the states and it was coin toss in six.
Not all of the potential economic factors were employed in this decision analysis. Property taxes, insurance, maintenance costs, and homeowners association costs can quickly add up. These are not paid directly by the tenant in addition to rent but are due over and above mortgage payments for homeowners. Nor is the potential deductibility of mortgage interest paid and property taxes included. This may not be a material exclusion for two reasons. First, just 30 percent of all people itemize their deductions, so for many these do not reduce taxes. Second, President Trumps proposes to double the individual deduction to an estimated $12,000 for an individual and $24,000 per couple. This would essentially require no itemization of expenses for a couple owning a $500,000 home with an 80 percent loan-to-value ratio.
Naturally there are other metrics important to the Buy vs Rent decision beyond financial factors. Access to specific school districts (which may not be available to either renters or owners under certain property availability circumstances), special needs properties, participation in property appreciation (when that occurs), and overall pride of ownership all can enter the decision process.
As usual, I invoke the TINSTAANREM axiom — There Is No Such Thing As A National Real Estate Market. Nor is there such a thing as typical buy versus rent decision that is indicative and applicable for the entire state. No doubt this decision varies by neighborhood and price range. Thus, if the GoBankingRates indicator is to rent, that may not necessarily be the correct solution for all. Ditto for buyers. Other factors need to come in to play to make a fully informed decision.
Still, this is a direct, straight-forward analysis that is easy to grasp. In addition, just look how quickly the cost of living can be compared generally from state-to-state given the monthly rental data.