Consumers these days are bombarded with information through the Internet. They can read reviews of any product they may be considering to buy. There are consumer reporting and review sites with the stated objective of advising consumers about what is a good deal and what is not. There are consumer product safety sites with loads of product safety information.
It’s “information overload” for many, but there is interest in reports by market area as to whether it’s more cost effective to rent or buy a home. Over at Trulia.com, an article about rent vs buy economics in October 2014 states: “Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. In fact, buying is 38% cheaper than renting now, compared with 35% cheaper than renting one year ago.”
There are obvious factors creating this disparity. Low mortgage interest rates for purchase and rising rents are the primary factors creating this situation. And, if all you look at are the direct costs of ownership as a snapshot in a market, it is clearly less expensive to own than to rent. Even considering that property taxes and insurance costs can rise outside the control of the owner, buying still looks pretty good.
I am a real estate investor, so I do tend to prosper more when there is a healthy rental market, whether investing directly in rental properties or fix & flip and wholesaling to other investors. Of course, there is a great profit potential in fix & flip to retail consumer buyers, and that market is really healthy right now. All of this considered however, there really are other considerations consumers need to think about when making the rent vs buy decision.
Non-cost Considerations of Rent vs Buy
Will you need to move in under 8 years?
Especially with today’s higher down payments, it is anywhere from around 6 to 8 years before a home buyer can expect to get their money out of a home sale after the costs of sale. Those can be significant, with title insurance and real estate commissions being the largest costs of sale. If you’re not sure about having to move being out of your control, buying may not be wise.
Are you just starting a new family?
This isn’t a problem really unless you do like many first time buyers and get into a starter home that’s fine for two of you. However, when children enter the picture within a few years, will you be pushed into upsizing and selling before you can recoup your costs, much less get any appreciation in equity?
Is being forced to move a rental issue?
Tenants have little control over when their landlord may decide to sell the home. Generally, leases are for a year or less, so you can possibly be forced into a moving decision far sooner than you like. One buyer surveyed said that they were forced to move three times in three years, so they bought as a self-defense move. Their costs of moving that frequently were high, even disregarding the inconvenience.
Are you trading travel costs in this choice?
Many of today’s best jobs are in technology, financial and medical sectors, and these companies tend to locate in large urban areas. Buying is usually much more costly close to the workplace. Moving farther out to buy affordably can result in hundreds of dollars in travel costs every month.
The smart move is to consider every factor impacting your lifestyle, instead of just looking at a direct cost breakdown. Sometimes renting may be a good “now” decision that you can far more easily change later than taking the buy first approach. Dean Graziosi
Don’t you wish you could lock in a mortgage rate for the next year while you decide when and where you want to buy, or until you get that down payment together? Unfortunately, we can only lock from around 30 to 60 days or so before a closing, so mortgage rate movement does motivate or demotivate buyers.
REITs, Real Estate Investment Trusts, have been doing really well over the past two or three years. A REIT is a trust that invests either in property or in the mortgages that finance it. They are like a mutual fund, with professional management, but tax considerations are different, as they pass through profits to the shareholders. REITs are a way for the very passive investor to get into real estate with modest funds and not have any involvement in ownership or management considerations.
However, the market forces that have helped REITs over the past few years also helped individuals, partnerships and other smaller entities to invest in residential and commercial properties. While inventories haven’t been great over the past three years, there are still bargains out there for rental investors buying in the foreclosure market. They’re different from the mass foreclosures at the beginning of the crash. Those were often homes with owners still living in them, and they were in ready-to-live-in condition. Today’s foreclosures are more often very damaged and in need of significant rehab work to make them livable.
Fix and Flip investors and their buyers are quite dependent on funding for the purchase and rehab, so interest rates overall are of concern. Of course we know that rising mortgage rates definitely impact retail home buying in a negative way. The Federal Reserve has held the line for a long while now at near zero interest rates in order to spur home buying and the economy. Inflation hasn’t been a problem, so this policy has remained in effect.
However, the Fed has begun to make comments and issue guidance that seems to be preparing markets for rising interest rates. Economists are predicting rate increases between June and September of 2015. Some REITs and indexes have already begun to show signs of lower expectations due to the belief that interest rate increases are definitely coming soon.
Whether you’re investing in REITs or buying single family rental homes, interest rate increases will definitely impact your ROI going into next year. This shouldn’t spur you to liquidate your holdings, as there are other factors at work besides interest rates.
• Inventories are still low, and homes aren’t coming out of underwater status quickly. • Rental vacancy rates are still at historic lows with rents still rising. • Higher mortgage rates will keep more buyers out of the market, which means they’ll continue to rent. • Your investing uncertainty is shared by the general consumer, so they aren’t really eager to rush in and buy.
Considering all of the balls in the air, juggling investments right now is tricky. Hold the line on what you have, and be very selective and use a sharp pencil in calculations for new deals.
The Case-Shiller Home Price Index is reporting steady price increases across the nation. The Case-Shiller 20-City Composite Index rose 5% year over year in February. This was compared to a 4.5% rise in January. The February gain was the largest monthly gain since July 2014. Of course, real estate is local, and some markets like San Francisco and Denver are doing so well they’re skewing results to the upside.
Supply and Demand Factors
Markets, whether real estate or groceries, all respond to supply and demand pressures. And there are a three supply factors and one demand item that are putting upward pressure on prices.
Homeowners aren’t Selling – Supply
Though the number of existing home sales has been rising consistently, the increase hasn’t been enough to spur homeowner to enter the market as sellers. Many are still underwater, owing more on their homes than they’re worth. Many others do not have enough equity to pay sales costs and pocket any money, so they’re in a holding pattern.
Many are concerned that even if they can sell with some equity that they will not be able to find another suitable home. They see prices rising, but because a lot of the reason is low supply with rising demand, they are not sure that there is another home out there right for them at this time.
Builders aren’t Building – Supply
Last year only about 700,000 new single family homes were built. This is far below what is considered a normal market, so the supply is low for new homes. Builders are reluctant to build on spec, adding inventory when they don’t see adequate demand. Their financing is still more restrictive than before the bust, so extra scrutiny goes into starting new projects.
Fewer Foreclosures Suitable for Retail Buyers – Supply
When foreclosures were pouring into the market right after the bust, many were occupied by the owners and were in livable condition. They didn’t need extensive rehab work. These homes qualified for mortgage loans, so retail buyers were able to grab them up. Now the situation is different. Most of the foreclosures are abandoned home in poor to terrible condition.
Investors are loving these as fix & flip opportunities, and the competition for them is causing prices to go up on the front end, resulting in increases at the sale end of the flip. There is less fix & flip to rental investors, with an increase of flipping in the retail market.
Mortgage Rates are Still Low – Demand
Freddie Mac reports that the 30-year fixed mortgage rate is around 3.56% compared to 4.33% at this time last year. This helps to grow demand with more people able to qualify for higher priced homes with the lower mortgage payments available.
There are a couple of opposing forces holding back more demand and even higher prices.
Tight Lending Rules
Lenders are still being stingy with mortgages. Tighter lending qualification requirements are keeping many buyers out of the market. There is some loosening, but it’s a far stretch from the liberal lending practices prior to the crash.
General Economic Concerns
The outlook for jobs isn’t looking particularly rosy, and wages are pretty much stagnant. There is a general concern for job security and economic prosperity among consumers. High student debt and poor job prospects are keeping graduates out of the first time buyer mode.
So, with a 4-to-2 score, four positive factors and two negative, prices are still rising. It’s not a bubble … yet. As prices continue to rise, more homeowners will see enough equity to consider selling, so this could increase supply and offset some of the price pressure. However, there is also some evidence that first time buyers are returning to the market. It’s going to be an interest year for housing.
I LOVE real estate and every facet of real estate investment. From wholesaling and flipping houses to rental property ownership, there’s opportunity for profit in every market, whether rising, falling, or sitting still. Sure, you have to adjust and change strategies with changing markets, but that’s part of the fun, and it cuts down on the competition when they can’t figure it out.
There are some changes taking place in most markets nationally right now. Actually they’ve been happening for some time, but they’re picking up steam. Just about gone are the days of dozens of foreclosures in every neighborhood ready for flipping. One thing that is certainly a thing of the past in most markets is the ready-to-live-in foreclosure. When they were coming down the pipeline in the tens of thousands every month, consumers could find a foreclosure that they could get financed.
Foreclosures are still happening, but they’re a different animal these days. Most are pretty trashed out, and there’s no hope of the average consumer getting a mortgage with the property in major disrepair. Investors are competing for the best candidates among this current inventory, and they’re still often selling most of these rehabs to rental investors … but not all. It’s time for an adjustment in the flipping model for some investors. It isn’t for all, but it can be a very profitable challenge to meet. Consumer buyers want homes, and there is an opportunity to fix & flip to the retail buyer.
The first, and most obvious, difference in this approach is in the pricing model. When you’re selling to another investor, they’re going to want to buy at a discount to current market value; at least if they’re smart. You’re working backward from the ARV, After Repair Value, of the home, through the estimated costs of rehab, and to the price you can pay to make room for your desired profit. This requires sharpening your pencil, good negotiation skills, and a process that works with few errors.
The consumer buyer is a very different customer. They’re searching for the right home for their family, and they seek the latest in features and amenities. They are also far less demanding in their negotiations, at least most of the time. In shifting to a retail market for your flips, the first consideration is that they will pay a higher price, but for what exactly?
The Flip Product for Consumers
Instead of shopping materials that will work in a rental or for another investor, you are going to be upgrading and trying to match or come close to the current finishes in new homes. It may be skylights, marble, hardwood flooring, or other finishes in demand by new home buyers. Your finished product will need to wow the couple when shown. Whether it’s the gourmet kitchen for the cook or the garage workshop for the tinkerer, these features need to be there to sell the home quickly and at a profitable price.
Costs Will Rise, So Prices Must for Profit
All of these upscale finishes will cost more money. Sometimes the quality of the sub-contractors will need to rise, so their costs will as well. Just being able to sell the home at a higher price to a retail customer isn’t enough. The costs of rehab will be higher, and it’s a learning curve for the fix and flip investor used to quickly flipping to another investor.
The biggest cost difference will be in using real estate agents to sell the property. You’ll almost always have to list it on the local MLS, Multiple Listing Service, and this will involve a listing commission. You can negotiate this, but expect anywhere from 4% to 6% of the selling price.
Another cost increase is in short term funding loan fees. If you’re using financing for the rehab, you’re paying interest while the home is up for sale. This makes it even more important to price it right from the first day listed. A quick sale is what you want. Of course, you’ll need to sharpen your pencil in every phase of a retail fix & flip to get the profitable outcome you want. Dean Graziosi
There are a great many people sitting on the sidelines when it comes to a home purchase. There are plenty of valid reasons for their hesitation:
• Can’t get the down payment together. • Credit score needs improvement. • Younger first time buyer has college debt. • Younger buyers living with parents with fewer good jobs available. • Concern over current employment. • Younger buyers saw relatives lose homes to foreclosure; hesitant to buy.
Whatever the reason(s), there are many people out there who may want to own a home now but can’t pull it all together in the short term. They understand that waiting could saddle them with a higher mortgage interest rate, but it’s a risk they feel they must take in an uncertain market.
Lease Purchase or Rent to Own – What is It?
In a lease purchase or rent to own deal, the seller leases the home to the tenant-buyer for a specified period. On or before the end of that period, the buyer has the OPTION, not the OBLIGATION to purchase the property. In other words, the tenant-buyer pays the lease every month and at some point can exercise their option to buy at a pre-determined price. That price can be a set dollar amount when the agreement is signed, or could be something like “at the appraised value as appraised by …….(jointly acceptable appraisal company).”
Buyer Benefits & Investment
The tenant-buyer gets to contract for a home they would like to own. The can take the time to rebuild credit and gather a down payment as well. These agreements are typically for three to five years in length. Remember that the buyer can simply move out at the end of the lease with no obligation to buy. However, if they’re serious about wanting to own the home and believe they’ll make it happen, they can do some improvements for their future benefit.
There is a cost for this option. It’s the option premium, a set amount of cash on the front end. It will be much less than a down payment, but it is non-refundable no matter what the outcome of the arrangement. In other words, if the option costs the buyer $ 2,500, they will not get that back, and the seller gets it and can spend it on the front end. The good news is that often the option cost is not much more than the first and last month lease requirements for a regular rental.
If you shop hard, you can find a highly motivated seller who has a need to move but hasn’t been able to sell. This gives you a better negotiation position with regards to the future purchase price. You taking over their mortgage payments as a lease frees them up to move on with their lives. They of course must understand that they could end up with their home again at some point.
The seller who may have been unable to sell but needs to move for better job opportunities or other reasons can do that. The get a moving stake in the form of the option payment. The set the lease payments to cover their mortgage, so they don’t carry away monthly dollar obligations. Of course, they want to carefully check out their tenant-buyers to be sure they’re good rent payers.
Sellers can also usually expect that better care will be taken of the property. The tenant-buyer intends to own the home at some point, so they take better care of it than a normal renter would. The agreement could also make them responsible for normal repairs, unlike the normal lease. Sellers like this as well.
Care in the Arrangement
Laws vary by state as to whether you can do this and how. Some lenders, if they find out, may call the loan due, but it’s rare that this happens, as it’s really just a lease with an option at the end. Few mortgages preclude leasing out the home.
Work with an attorney acceptable to both sides and examine the lease documents carefully. They should be fair to both parties.