A local analysis: Is it Better to Rent or to Buy?
You may have seen reports in the news recently saying it’s better to rent right now than it is to own your home. But before you let that impact your decisions, you should understand what these claims are based on.
A lot of the time, these reports are assuming things that aren’t realistic for the average household. For example, the methodology behind one of those reports says that renting is the smarter financial option because of the opportunity to invest money elsewhere. It assumes renters take the money they’d spend on costs tied to buying a home and put it in an investment portfolio.
But here’s the thing – most people who rent aren’t making those investments. Ken Johnson, Co-Author of the BH&J National Price-to-Rent Index, explains:
“One of the difficulties with the rent and reinvest model is many people . . . simply rent and spend the difference. . . . That’s wealth destroying.”
The reason homeownership is one of the best investments you can make is the wealth it helps you build. That’s why there’s a significant difference between the net worth of the average homeowner and the average renter (see graph below):
So, before you renew your rental agreement, think about the opportunity to build wealth that homeownership provides. Below is a comparison of a 3 bedroom, 2 bathroom apartment cost in Sun Prairie versus purchasing a home worth $400,000 in Sun Prairie. In about 18 months you would break even, and after two years you would be ahead $6,804. Being transparent, we did make some assumptions in our calculations. The assumptions are that the interest rate for your home purchase is 6.5%, the home would appreciate at 5%, and rent would appreciate at 3%. These percentages are conservative, in the past few years we have seen the Fair Market Rent (FMR) increase 13.7% and the average home price increase 18.83%. If those trends continued moving forward, the break-even point would be around 6 months, and after two years would have been ahead over $130,000. The info graphic below uses our conservative calculations.
Bottom Line
If you’re unsure whether to continue renting or to buy a home give us a call and we can do the comparisons on an individual level to give you the knowledge to make an informed decision.
John Reuter
Integrity Homes
Broker/Owner
608-669-4226
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