As a follow up to our article at the beginning of last year here, we want to look at the pros and cons of renting for another year. Some families want to explore home-ownership, others prefer the flexibility of renting, while some have no choice at this time. Our goal – to cover some reasonable expectations looking forward to 2017. If you have considered houses for rent in 2017, this article may provide you some information to weigh in.

REALTOR.com Article – The 5 Real Estate Trends That Will Shape 2017

• Interest rates likely to climb
• Homes still rising in value
• Renting is more expensive than paying for a mortgage in 380 out of 381 “metropolitan statistical areas” across the county
• Fewer Homes for sale, and selling faster
• Credit scores as low as 500 can obtain a mortgage
• Loan options for credit scores as low as 500
• Loan options for borrowers with a short sale or foreclosure

Houses for Rent – The Opportunity Cost

There exists a concept I have tried to explain to families that I have found difficult to convey, but I want to give it a shot here. I believe the concept originates in the study of economics which many refer to as “Opportunity Cost.” The “definition” – “a benefit that a person could have received, but gave up, to take another course of action” – or in other words, the value given up in order to select an alternate choice.

Example:

The Scenario

You pull into the gas station because the gas light came on and you will not make it home on the little that remains.  You only have $3 until tomorrow when you get your paycheck – and you still have to get to work, and then someplace to cash your check.  As you walk in, you see some of your favorite snacks have a discount tag on them, and the hunger feeling you have ignored all day hits you pretty hard.  What do you do?

One Option

The number of choices here exceeds the first two that automatically come to mind.  While only one of them may seem logical to you, the main point I intended to convey spotlights the limitation of resources when making a decision.  No matter what choice you make, each choice comes with an opportunity cost.  If one decides to purchase the gas to get home, the actual cost equals the $3 in gasoline; the opportunity cost would include the feeling of satisfying the hunger as well as that favorite snack craving.  With this choice, you give up that feeling in order to make the decision to purchase the gas.

Another Option

Making a different choice, one could purchase the snacks, again the actual cost being something close to $3, and the luxury of driving home the opportunity cost, because now you have to walk, at least part of the way.  Again, you give up the ability to drive home to make the choice of purchasing your favorite snack and lower your hunger slightly.  Except now, you also have to walk to work the next day, and walk to cash your check, and walk again back to your car.  But those snacks… so worth it!

Concept Summary

This concept of Opportunity Cost seems to evade understanding and functional use for many people when making decisions.  Most of us tend to only think about the short term “what will this cost me now” out of pocket actual expense.  But the real expense includes not only the actual dollar amount, but also the value of the next best alternative that you end up not choosing.  To compound the issue further, these costs include things we may have difficulty putting a price on, like time with your family.

With this concept in mind, we move on…

Houses for Rent in 2017

Renting is still very likely the best (or only) option for many families.  Mainly for those families that simply cannot purchase now, either due to the lack of income or the affordability in the area they want.  Some may need or want to stay mobile, for personal reasons, their employment or otherwise.  However, with the concept of Opportunity Cost in mind, the considerations for renting for another year narrow significantly, if the possibility and desire to purchase exists.  This appears true nationwide as well as in the Central Florida area.

Slower Increase

The main benefit to finding houses for rent another year includes the fact that rental rates will increase less than homes values.  According to Phillip Molnar of The San Diego Tribune, the average rental rate will increase roughly 3% this year, while the average home value will rise by 5%.  However, even this “pro” has a long-term downside, which we will discuss below.

Potential Frustration

We have one other consideration that will make renting more appealing, even though it would not go into the category of “pro rent.”  The potential for stress and frustration when looking for houses to purchase.  This potential stems from two factors: how fast homes sell, and the low housing inventory.  These two points can make the house hunting portion of purchasing a home less attractive than looking at houses for rent, or staying in your current rental.  Why?  Because the smaller inventory means less homes to even consider.

Then, add in the fact that investors tend to offer cash as opposed to offers that require a lender (most of us).  Most families moving out of a rental simply do not have the cash reserves to compete with investor cash offers.  Even with the proper advice from a good real estate expert, clients submitting offers with financial contingencies still have a hard time competing with cash offers, and things can get frustrating. Understandably.

Pro Rent Summary

In conclusion, what to expect this year if you either need, or want to look for houses for rent.  Expect a rate increase of on average 3% across the country.  In the Central Florida area, according to Mary Shanklin of the Orlando Sentinel we will see a rental rate increase closer to 5% on average.  Orlando, when compared to over 30 other metro areas, had more rental rate spikes than ⅔ of the other metro areas in 2016, and in December ranked the 35th most expensive rental market in the nation.  This trend will likely to continue through 2017.

Houses for Rent – The Alternate Choice

All of that considered, that real question that still needs answered includes: Which option best suites your family?  Will going through the stress and frustration that can potentially come from hunting for houses to buy put your family in a better situation in the long run?

Long Run Monthly Costs

Here are some things to consider when thinking about renting for another year verse taking the leap and purchasing a home.

• Realtor.com reported the Central Florida area (denoted as Orlando-Kissimmee-Sanford in their report) as #7 top housing market in the top 100 Metro areas in the United States
• Potential for 3 interest rate increases from the Fed over the next year
• Renting costs over 7-years exceeds $2,500 over owning a home
• With tax savings considered, after 3 years rental payments exceed mortgage payments (See Below – Credit to Ginnie Mae Web Site)

The chart below shows a cost comparison for a renter and a homeowner over a 7 year period.

• The renter starts out paying $800 per month with annual increases of 5%
• The homeowner purchases a home for $110,000 and pays a monthly mortgage of $1,000
• After 6 years, the homeowner’s payment is lower than the renter’s monthly payment
• With the tax savings of home-ownership, the homeowner’s payment is less than the rental payment after 3 years

Time May Run Out (For Now)

What does this mean to the average family?  My interpretation says that Central Florida still has the potential as a good area to purchase a home during 2017.  However, the potential for taking advantage of the best prices will quickly disappear.  Why?  We have a few events playing out that can make house hunting difficult for a specific group of potential home buyers.  As mentioned earlier,

• Rising rental rates, almost though not quite on pace with the climbing home values
• Interest rates starting to climb, and may reach record highs since the 2008 recession
• Income rates not keeping pace with the rate that homes gain in value

How does all of this affect you?  While many of us dislike rising interest rates, they usually indicate a strengthening economy.   However, with homes values increasing, usually also considered a good thing, the two together add to the cost of obtaining a home.   They both increase the monthly payment on a note.  Then add in the fact that together they increase the size of the note payment faster than the potential home buyers income increases, and the longer a family waits, the more difficult it becomes to qualify for a home purchase.

Now, add in the investor/cash buyer to the mix.  Orlando ranked in the top 30% of cities with “High Potential for Passive Rental Income” – telling investors they should focus on the Central Florida area.  With the rental rates increasing nearly as fast as the home values, and many families opting to wait on purchasing and choosing to look at houses for rent instead, it makes a lot of sense for an investor to purchase a property and rent the property to a tenant.

Pro Purchase Summary

There exists risk in every decision we make.  Many times, the risk seems negligible, almost non-existent.  Other times the risk seems excessive and potentially insurmountable.  Sometimes, it truly is.

In the realm of deciding on home-ownership verses looking at houses for rent, the risk lays in the potential.  In this case, the potential for spending less money on a place for your family to live.  Also, in the potential to improve your family’s long term financial portfolio.  Or, on the other side of that same coin, the potential to make a commitment one fails to keep.  And the potential to waste years correcting a single error in judgment.

Mathematics provides neutral unbiased answers.  Given the proper circumstances and the desire to purchase a home, the math points to home-ownership as the clear choice.  Unfortunately, families cannot, or rather should not make decisions based strictly on math.

Summary

With so many moving parts and things to consider, each family will have to consider all of the information and determine for themselves which option will benefit their family most.  The big issue right now might come down to timing.  If a family waits, they may wait themselves out of the option – for now.  Not saying this will permanently prevent a family from purchasing.  We have a cyclical market, and the market will once again make its way around to another point when the same family has the potential to purchase.  However, if the desire exists now, and the family has access to the means now, waiting may cost more in the long run than taking the dive now.

And for those that worry they do not have the credit to qualify, please contact us!  We have lenders and programs out there that can help you fix your credit, and purchase a home!  Do not pay ridiculous rental rates that will only go up if you do not have to!

Not everyone should pursue home-ownership.  However, some things to consider when looking at houses for rent:

• $1,000 a month can get you up to a $200,000 home.  The interest (which is a significant portion of your early payments) is tax deductible.  Rent is not tax deductible
• You can sell the home at a later date and in most cases walk away wealthier.  You walk away with only a rental history when you rent
• When you rent, you are restricted by the Landlord.  When you own your own home, you can decorate and landscape however you want (within reason!)

Low credit, and very little money to put down – these problems have solutions we can possibly assist with.  Again, buying is not for everyone, and we help renters, buyers, and sellers alike, but do not be deterred by solely these concerns!

Ask us how we can help you get into your #dreamhome!

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