"For what you pay in rent you could own the house"

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"For what you pay in rent you could own the house"

Patrick M.
WI · Member since 2018 · 123 posts · 69 votes
I lost some sleep last night.  I'm having problems renting my SF.  The price is now at 1850 plus utilities.  

The argument often heard is "well you can own a home for what you're paying in rent."  So I wanted to look at some numbers.  

My SF is worth 245-250k.  at 3.5% down (the famous it's cheap to buy a house you only need a little money) you need 9k cash.  (without closing costs).  
Your mortgage is still 1730.  plus utilities and maintenance.  
As the story goes the more cash you have to pay down the lower you get your mortgage payment.  

My point is the famous 3.5% down puts a person in the same range as my rent price.  Without the maintenance costs.  

Is renting supposed to be drastically MORE affordable than buying?  As in rent price at 1650? 1700? 1500? for a single family in a B area.  Are they supposed to be renting a nice updated home for significantly cheaper than the cost to own?

Keep in mind the house is updated which is hard to come by at this price point in our area.
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Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
7y

Don't buy a house that's $250K. Problem solved. 

14Reply
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  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    7y

    @Patrick M. rental prices are set by the market, which is indirectly influenced by the prices of homes. The tough thing, though, is that they are not always directly correlated. You need to look at the market around you to see what you should be charging. 

    4Reply
  • Brandon Roof
    Rental Property Investor · Member since 2019 · 187 posts · 230 votes
    7y

    I wouldn't get too caught up in hypothetical financing scenarios.  If your place isn't renting there are usually only a few reasons.  Seemingly, and as @John Warren is somewhat alluding to, you are likely overpriced considering what else is available in your market.  Potential tenants may not value or appreciate the updates to the property as much as you might.

    5Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    7y

    There's no good answer to this. In some places there's an inversion in price to own vs. rent. This is usually temporary, as savvy investors will notice this and purchase the cheaper homes and rent them out for the higher price, which may drive up home prices, drive down rent, or some combination. More common is for rent to be lower, sometimes significantly, to the price of owning. Once you get beyond small numbers, though, it could simply be a case of not enough people able to come up with down payments. Or it could be a market that encourages renting because of transience in the economics of the area - think military, college town, etc. 

    Very few people look at rentals and think "Hmm, I think I'll go buy a house because it's the same price". Most people who look for rentals either don't want maintenance, need to move in short order, or don't have enough money to buy a house. 

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  • Patrick M.
    OP
    WI · Member since 2018 · 123 posts · 69 votes
    7y

    @Brandon Roof @John Warren yes I'm afraid you might be correct. For comps I can really only go off the nearby luxury apartments which I am priced competitively with. For SFR there isn't much available 1 comp duplex at 1850 as well.

    As far as they might not value the updates I am starting to agree there too.  It seems to me that this particular house is a 1650-1700 regardless of how much "lipstick" you put on it.  This is my first place but my eyes are opening to the fact that renters might care more about the $100 price difference than a brand new kitchen.  The new white kitchen is just a bonus.  

    4Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    7y

    Don't buy a house that's $250K. Problem solved. 

    14Reply
  • Patrick M.
    OP
    WI · Member since 2018 · 123 posts · 69 votes
    7y

    @Jaron Walling good point. Wasn't bought for 250k.  That's appraised value after rehab.  

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    completely different motivations between a renter and a buyer.. its not just the price..  its tax benefits.. the forced savings through mortgage pay down .. also being their own boss ( don't have to listen to a landlord and follow their rules) 

    most homes that are sold FHA just for the record the Seller will almost 90% of the time have to give credits to the buyer for closing costs.. and there are down payment assistance programs.. and if your in semi rural area there is USDA 100% financing.

    biggest mistake landlords make is holding out for an extra 100 dollars a month..  think about it your house sits one month maybe two months.. if you had lowered the rent by 100 .. it would take you in your case 35 months to break even.. just do the math.

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    11Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    JD Martin is right.  There are many reasons why people chose to rent rather than own; no savings for down payment, poor credit, move a lot, new to the area, don't want the responsibility of owning.  In most cases it is cheaper to pay a mortgage than it is to rent or why would landlords rent homes?  The rent needs to cover the expenses.  

    What the people who say it is cheaper to own than rent are forgetting is the taxes, maintenance, etc.  So the next time you get that comment, turn it around and say ....oh you want to buy it, here's the sales price and yes the mortgage will be slightly less than the rent.  Otherwise, say that is what a 1 bedroom rents for in this area and leave it at that.

    2Reply
  • Patrick M.
    OP
    WI · Member since 2018 · 123 posts · 69 votes
    7y

    @Jay Hinrichs thanks for the response.  You're right.  The math certainly doesn't lie it's just a matter of accepting it.  

    0Reply
  • Patrick M.
    OP
    WI · Member since 2018 · 123 posts · 69 votes
    7y

    @Theresa Harris I agree with you completely.  I haven't received that comment from prospective tenants just friends, family.  I'm also thinking out loud as to why my place isn't renting.  As always it seems its another case of pricing.  Even though I feel I am competitive the renting market doesn't seem to feel the same way. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Patrick M.:

    @Jay Hinrichs thanks for the response.  You're right.  The math certainly doesn't lie it's just a matter of accepting it.  

    I know we are all guilty of it at sometime in our landlording career..  But vacancy and turn over KILL landlords.

    if you have gone 2 months without a tenant  and rent is lets say for easy math 1500 a month you lost 3k and your trying for 1750 or whatever its not renting end of the day you will end up lowering the rent to 1500.. and you lost 3500 you will NEVER recover and so how does that make your numbers work.. very often it makes it negative cash flow for that year and or a little longer.  really depends on how many rentals you have.. if you have  bunch of them you can income average and its no biggee if your just starting out you end up starting out in the hole first year..  Then you sometimes wonder why did I do this ???  is being a landlord really all that its cracked up to be.. ?  You get all these self doubts going..  And of course very market specific.

    But when you look at lower value assets lets say any home that can be purchase for 100k and under which is a great portion of the rental stock in the mid west.. most of those renters pay 700 to 1000 for the house and if they bought them their all in payments would be less than rent and by a lot in many cases.. yet they still don't buy..  Usually credit challenged and or just stuck in their socio economic life.. 

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  • Brian Ellis
    Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes
    7y

    You could have the rent listed too high still. What do your numbers look like? 

    Just because your house is updated more then nearby properties, doesn't mean you will receive higher rent. Renters will opt for a cheaper apartment over higher quality in a lot of circumstances. I know when I rented, $100 made the world of a difference. 

    2Reply
  • Patrick M.
    OP
    WI · Member since 2018 · 123 posts · 69 votes
    7y

    @Jay Hinrichs.  Pretty much summed up my thoughts at 2am this morning.  It shouldn't be this hard and is it worth it?  I know you have a ton of experience so thank you for chiming in.  I don't have enough properties to average it out by the way :) (YET!) 

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y

    Renters are renters, and buyers are buyers....and then there are those in transition between the two (going in either direction).

    Buyers look for certain things, that renters don't...and buyers will pay for them, and renters won't. Comparing your SFH to any apartment, regardless of how high end either is, doesn't work. Apartment renters and home renters are two different groups.

    Next time, when you analyze before you buy, start with the going rents in the area for other properties with the same description as the one you're thinking of buying.

    Also, there is a limit in every rental market, of just how high in rent the renters will go.  Upgrade accordingly.  As you're finding out, any upgrades above the market/area limits, are what gets you rented before your competition...but doesn't increase the rent.

    9Reply
  • Patrick M.
    OP
    WI · Member since 2018 · 123 posts · 69 votes
    7y

    @Brian Ellis PITI is 1330.

    Rehab is 15k

    Down payment was 42k. 

    Goal was 4-500 over PITI. Currently sitting $500 over.

    I was the same way as you that I had certain thresholds for paying rent.  I also knew I would buy eventually and wasn't stuck as renter due to credit/etc.  

    2Reply
  • Patrick M.
    OP
    WI · Member since 2018 · 123 posts · 69 votes
    7y
    @Joe Villeneuve  Also, there is a limit in every rental market, of just how high in rent
    the renters will go. Upgrade accordingly. As you're finding out, any
    upgrades above the market/area limits, are what gets you rented before
    your competition...but doesn't increase the rent.


    Bingo.


    Buyers look for certain things, that renters don't...and buyers will pay for them, and renters won't. Comparing your SFH to any apartment, regardless of how high end either is, doesn't work. Apartment renters and home renters are two different groups.

    Rental house market in my area was very limited. Mostly apartments. A few SFH 2-3 beds in rough shape. Looking back on my sheet I had 3 comps (size, bedrooms, updates) ranging from 1500-2000.




    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y
    Originally posted by @Patrick M.:

    @Theresa Harris I agree with you completely.  I haven't received that comment from prospective tenants just friends, family.  I'm also thinking out loud as to why my place isn't renting.  As always it seems its another case of pricing.  Even though I feel I am competitive the renting market doesn't seem to feel the same way. 

    Pull the ads and repost it with a lower rent.  Once you have tenants in there and they've been there a year, increase the rent (not by $100), but by inflation.  Also try posting the ads in a few other places. I know for me renters look at some sites more than others.  I've never listed on craig's list or facebook, but have on kijiji and used(insert town name). 

    2Reply
  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    7y

    @Patrick M.

    Tends to be more of a problem for larger rentals. Over 3-4 bedrooms.

    I like my 1 and 2 bedroom units.

    2Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    7y
    Originally posted by @Jay Hinrichs:

    I know we are all guilty of it at sometime in our landlording career..  But vacancy and turn over KILL landlords.

    if you have gone 2 months without a tenant  and rent is lets say for easy math 1500 a month you lost 3k and your trying for 1750 or whatever its not renting end of the day you will end up lowering the rent to 1500.. and you lost 3500 you will NEVER recover and so how does that make your numbers work.. very often it makes it negative cash flow for that year and or a little longer.  really depends on how many rentals you have.. if you have  bunch of them you can income average and its no biggee if your just starting out you end up starting out in the hole first year..  Then you sometimes wonder why did I do this ???  is being a landlord really all that its cracked up to be.. ?  You get all these self doubts going..  And of course very market specific.

    This is a good point - cost/income averaging over a number of units. I could have 50% of my places sit vacant permanently and still be making money overall. That's difficult to do if you only have 1 or 2 properties. 

    With regards to rent setting: I never set my rent at a price that I'm not willing to hold firm to. In my opinion, setting rent too high and then having to drop it is a killer for your property. People looking for rentals see and remember houses, and even if you pull it from the listing and relist it later with a lower price most people in the market will remember the house and the higher price. That's not saying you shouldn't do that if you're overpriced - by all means you shouldn't let a house languish at a price the market won't bear. But when it comes to renting out a property, if you aren't sure what the market is (in which case you maybe should not have chosen that property) and can't figure out a good rent point, a good strategy would be - figure out your costs that have to be met, add what you would consider a bottom-line monthly profit you'd be willing to do this for, and see what that equals.

    Example: Monthly costs of $700, you don't want to do this for less than $200/month = $900. How does that compare to the market as best as you can tell? If it's grossly undervalued, then pad your bottom line, consider it gravy, and keep your price to the lower end of what you can find for rent. Once you have some experience in the market you'll have a good feel for how far you can push that boundary. If that price is over the market, it was probably a bad investment to begin with, and you might want to consider an exit strategy - but in the meantime, you'll have to either suffer vacancy, get lucky, or take less than you want per month until you get it figured out. No matter what your goal should be to ensure the property pays for itself. If it can't do any better than that, figure out how to dump it and move on. 

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  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    7y

    @Patrick M.

    You didn’t mention location. Is this a small town or rural area?

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    0Reply
  • Patrick M.
    OP
    WI · Member since 2018 · 123 posts · 69 votes
    7y

    @Anthony Gayden suburb of Milwaukee.  

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y
    Originally posted by @Patrick M.:
    @Joe Villeneuve  Also, there is a limit in every rental market, of just how high in rent
    the renters will go. Upgrade accordingly. As you're finding out, any
    upgrades above the market/area limits, are what gets you rented before
    your competition...but doesn't increase the rent.


    Bingo.


    Buyers look for certain things, that renters don't...and buyers will pay for them, and renters won't. Comparing your SFH to any apartment, regardless of how high end either is, doesn't work. Apartment renters and home renters are two different groups.

    Rental house market in my area was very limited. Mostly apartments. A few SFH 2-3 beds in rough shape. Looking back on my sheet I had 3 comps (size, bedrooms, updates) ranging from 1500-2000.


    If the rental market in the area was limited to just 3 comps, of which the high and low end of the range was too far apart to be of any use, what does that tell you..at least for next time?

    0Reply
  • Patrick M.
    OP
    WI · Member since 2018 · 123 posts · 69 votes
    7y

    @Joe Villeneuve target the lower 1/3 of the range?   The comps were literally 1500, 1875 and 2000.  Skewed towards the price I'm asking....but having a hard time getting.  Again interest HAD been high.  I have gotten applications back but no follow through. Changed my process to encourage more applications but prospects dragging their feet others not qualified. 

    0Reply
  • Eddie Brady
    Realtor · Frederick, MD · Member since 2019 · 112 posts · 63 votes
    7y

    @Patrick M. Simple answer. This is not a good rental. Either live there or sell

    2Reply
  • Erik W.
    Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    A good rule to live by is never take advice or comments from non-real estate investors too seriously, unless said person has a lot of business experience in a related area that would transition over well.

    Buying vs. renting are two different balls games entirely, and affordability is only one factor in the equation.

    Millenials were renters for a long time because they delayed having families and wanted to be able to pick up and move at the drop of a hat with no string attached to chase their dream job.  That's a renter.  Now they're settling down and starting families, have careers locking in, established roots in the community, etc.  That's a home buyer.

    Some older, retired folks don't want to mess with the issues of ownership like mowing, snow removal, maintenance, etc.  More renters.

    Bottom line: Any one who uses the phrase, "You can just buy a house for what you pay in rent" clearly hasn't thought thru all the ways that phrase is insufficient, so when I hear that I just nod politely and cross them off my list of potential competitors.

    5Reply
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