Friday, February 17, 2012

Is buying cheaper than renting?

Is buying cheaper than renting?

In order to compare buying to renting, I'll need to pull similar data from the MLS.  I'll also need to make some assumptions about the variables involved in a purchase transaction which will impact the monthly cost.  So, let's start with my assumptions:

Since we're comparing buying against renting, I'll assume buyers are using an FHA loan with minimum down payments.

  • FHA loan - 3.5% down payment

  • FHA loan - 2.25% up front premium (rolled into loan)

  • FHA loan - 0.55%/yr annual premium

  • Homeowner's Insurance - 0.35%/yr of cost to rebuild.  For this example, let's assume the cost to rebuild is $100/sqft.

  • Property Taxes - varies, let's assume 0.7% of sales price for this exercise.

  • Interest Rates - assume 4.5% (, with credit score from 680-699, shows 7 lenders with apr < 4.5%)

  • ** my numbers should get us in the ballpark – close enough to make a valid comparison.  If anyone sees something grossly inaccurate, please let me know.

Next, I pulled data from the MLS based on the following:

  • Single Family Detached Homes

  • Sold / Rented in January, 2012

  • Located in Zip Codes 85382 and 85383 (North Peoria)

  • Print-outs of the data can be found here for rentals and here for purchases.

Finally, I took the purchase data & ran each home through the above FHA formulas to determine how much a buyer would spend per month & per year.  I also annualized the monthly rent rates so I could compare the annual costs of renting vs buying.

So, what were the results?  Take a look below:

Range of Size (sqft)1,190 – 4,8031,091 – 4,933
Median Size2,111 sqft1,968 sqft
Average Size2,247 sqft2,175 sqft
Average Yr Built20012000
% w/ pool45%49%
Avg Annual Cost, 1,500 – 2,000 sqft$11,510$15,698
# properties, above4734
Avg Annual Cost, 2,001 – 2,500 sqft$16,341$17,063
# properties, above3320

Wow – that is significant!  Based on a decent-size sample of properties, in the 1,500 – 2,000 square foot range, it costs 36% more to rent than to buy in today’s market!!

-Chris Butterworth