As a rental agent, you may work with a variety of renters who are looking to find their next apartment or single-family home. For many of these renters, you may be the real estate agent they know best, so they may reach out to you when their lease is up and they’re looking for their next home. For a percentage of these tenants, the question of rent vs. buy may be foremost in their decision-making, especially in today’s active real estate market.
If you’re working with current renters who are trying to make decisions about their next steps, it’s a good idea to take a systematic approach to the question of rent vs. buy so that you can help clients make the best possible choice. After all, buying a home is about more than just dollars and cents. It’s also about lifestyle and long-term planning.
Calculating the cost of rent vs. buy
For current renters who are trying to determine whether renting or buying makes more sense, it is important to crunch the numbers and find out both the upfront costs and the budget needs for each.
For renters, the upfront costs include:
- Application fees
- Security deposits (usually first and last month’s rent)
- Pet deposits, if applicable
The monthly cost is usually limited to the monthly rent, but may also include:
- Pet rental, if applicable
- Repair deductibles
- Required maintenance like lawn care, which can be outsourced or performed by the tenant.
For homeowners, the upfront costs include:
- Down payment, which includes Earnest Money Deposit (EMD) and cash reserves
- Home inspection and appraisal fees
- Closing costs
Monthly costs include:
- Mortgage payments
- Private mortgage insurance (PMI)
- Property taxes
- Homeowners insurance
- Homeowners Association or Condominium Association fees
- Home maintenance and repairs
- Lawn care, pest control, and other services, which can be outsourced or performed by the homeowner.
One of the things that many first time homeowners underestimate is the ongoing cost of home upkeep. In addition, while they may have a good handle on their mortgage payment, they may not take into consideration how much property taxes and homeowners insurance, along with HOA or condo dues, will increase their monthly payments.
For those homeowners who are financing with a low down payment loan product, PMI can add significantly to the monthly mortgage payment for several years, until at least 20% equity is achieved. It is essential for buyers to spend time looking at the numbers with a trusted lender or financial advisor to determine how much home they can actually afford.
What follows are some considerations to take into account when you’re working with potential first-time homebuyers. Discuss these items with your clients and find out whether renting or buying makes sense for their particular circumstances.
Renting might be right for folks who…
For many young professionals, building a career means having the flexibility to move from place to place in order to take advantage of opportunities as they arise. For others, the choice to move is based on a desire to experience new cities and new people, unbound by excessive responsibility.
Whatever the reason, for folks who move frequently, renting is usually a better option. The cost of entry to a new apartment is minimal compared to that required to purchase a home. In addition, rentals usually don’t require a great deal of upkeep or maintenance, so they may make more sense for this type of personality.
Plan to move soon
Similarly, if someone is planning to move within the next five years, it’s usually best to rent instead of buying. That’s because it takes around five years to recoup the money you’ve put into closing costs and to build enough equity to make the home sale feasible.
For those who wish to buy even if they know that they’ll be moving within the next few years, it may be a smart idea to purchase a property with an eye toward investment potential. As an experienced rental agent, you can help your client think through matters of property management as well, so that they are prepared to successfully monetize the property once they have moved.
Experience income variability
For renters who job-hop frequently, are self-employed, or work primarily in seasonal positions, renting may feel more manageable than qualifying for a home loan or committing to a 30-year mortgage amortization schedule. They may be unsure how to put together the upfront funds they need for a home purchase or they may be concerned that they will not be able to pay their mortgage payment long-term, resulting in a foreclosure that significantly impacts their credit rating.
For those who are interested in home buying, explore grants and down payment assistance programs designed to help lower income residents afford a home of their own. In addition, there are mortgage products designed for the unique needs of self-employed individuals, with underwriting requirements that take into account their lack of W2 salaried employment. Most of all, help them to come up with a realistic plan for budgeting so that they are able to pay their mortgage on time every month.
Need to save up for a purchase
Some potential buyers underestimate the amount of money required to purchase a property. It’s not just the down payment that they’ll need -- they’ll also require closing costs, inspection fees, and other charges. In addition, they may end up paying for repairs or renovations after their purchase in order to make the home more attractive or functional.
It’s important to help your client think ahead to the financial requirements of a home purchase and of home ownership. If they don’t already have one, help them find a trusted lender so that they can crunch hard numbers and make realistic estimates of the money that will be needed to answer the question of rent vs. buy.
Need to get their credit in shape
Other potential buyers may need to take a look at their credit reports and improve their overall financial eligibility for a mortgage. The lower the credit score the higher the interest rate, so even if they qualify for a mortgage your buyer may struggle to find a cost-effective mortgage.
One way for a renter to improve their credit is through credit reporting from utility companies and landlords. If you don’t already, consider implementing this type of program and allowing renters to opt in so that their on-time rental payments help them improve their creditworthiness.
Are unsure where they want to live
There’s a reason that people say real estate is all about Location, Location, Location. That’s because while you can change a home’s features, landscaping, and even architectural style to some degree, you can’t easily or affordably change its location.
If your potential buyer is struggling to decide which neighborhood makes the most sense, it’s a good idea to help them explore their options. They may also be waffling between a condo and a single-family home, or between a charming retro style and new construction. Whatever types of choices they are wrestling with, you’ll do them a favor if you help them take their time and make the right decision rather than rushing into something impulsively.
It might be time to buy if…
They’re interested in building equity
One of the biggest advantages of home ownership is the chance to build equity through consistent on-time mortgage payments, smart home improvements and market-related appreciation. For renters who are getting serious about purchasing a home and taking advantage of the financial benefits that accrue from building equity, you can provide a variety of valuable resources.
Check with your favorite lender and have them provide you with a standard amortization schedule so that you can help your potential buyer visualize the impact their mortgage payments will have on their ability to build value in their home. In addition, talk to them about the types of home improvements that pay dividends in terms of added resale value down the road.
They’re interested in long term financial stability
One of the frustrations of renting is that every lease renewal brings with it the chance for a landlord to raise the rent, making their current home unaffordable. By contrast, a fixed rate mortgage provides a consistent, reliable payment schedule that lasts for the life of the loan, at which time the home is fully paid off.
This predictable pattern of payment can make the rent vs. buy equation appealing for budget-minded individuals. In addition, because they are purchasing a home at today’s prices, they’ll enjoy the added value that inflation gives to their home through appreciation rather than dreading its effect on their rent payment.
They’re interested in long term housing stability
Similarly, a rental can be sold or can become unavailable at the end of every lease term. An owner can sell to a new investor who may be unwilling to renew the lease or may want to flip the property for resale. For many reasons, renting can lead to housing instability, especially in markets where there is high demand.
A smart home purchase, by contrast, provides greater stability and allows the owner to call the shots, deciding when it’s the right time to make a move. Talk to your buyer client about the historical prices of properties in their chosen neighborhood and how to find solid homes that tend to hold their value.
They’re interested in the freedom that goes with ownership
No matter how great a rental agent or property manager you are, there will be frustrations that come with renting. At some point, most people want to be able to hang a picture without worrying about nail hole damage or to change the paint color or landscaping without asking for permission.
For hopeful home buyers who are interested in creating a space that reflects their taste and style, rent vs. buy may come down to a matter of personal preference. These buyers may simply be looking for the chance to tend their own gardens and develop properties that work for them and their families.
They’re prepared for the responsibility that goes with ownership
Home ownership is a big step and it’s important for potential buyers to understand all that is involved. An experienced renter who is used to calling the property manager whenever a repair needs to be done or who is used to having pest control and lawn care taken care of will need to adjust to the requirements of ownership.
Rent vs. buy is, in many ways, about figuring out how to maintain the property and budget for the unexpected. It may mean becoming a DIYer or weekend warrior or having the budget to bring in the experts you need when things are not working. There’s definitely a learning curve involved, and new homeowners should be prepared for that.
They want more choice in their home style or location
At any given time, there may only be a few rentals available in a chosen neighborhood and there may not be any that conform to the specific style and features on a renter’s wishlist. Home ownership can offer greater choice and more options. In addition, ownership can offer potential home options in neighborhoods where rental properties are few and far between, or in condominium communities where rentals are not allowed at all.
Whether you’re working with clients who are making the decision to rent vs. buy or simply streamlining your current onboarding and review system. RentSpree helps you do more. At every stage of the rental process, from initial application to tenant services, you’ll find secure document storage and transaction management as well as resources for renters insurance.