Buying a Home short-Term Or Renting?

So you’re torn between buying a home short term or renting short term, let me break down the options to help you decide what is best for you and your situation. 

Let’s say your time frame is 3 years, your job or your schooling is bringing you out of state and you’re desperately trying to figure out what option is best for you and of course worth the money. Do you buy a home in hopes for appreciation over the next 3 years or do you bite your tongue and pay someone else’s mortgage for the next 3 years? In this blog, I am going to break down the cost of both, as well as introduce some factors that must be take into consideration in your decision. 

Let’s first take a look at how much it would cost to purchase a home. Let’s say the average home price in most areas is $200,000 (just for the sake of this example. I know the U.S average home price is around $320K). You put down as little as you can on the home at 3.5%. 

Yes, there are programs that allow you to put 0% down using the USDA program, but that’s only in eligible areas, so I’ll base this on a 3.5% down conventional mortgage. 3.5% down on $200,000 home is $7,000. Then let’s take a look at closing costs, which consist of origination fees, appraisal fees, title searches and insurance, surveys, taxes, recording fees, credit report charges, property taxes and homeowners insurance. 

All of that can run 3-5% of the loan amount. In this example I’ll calculate the middle of the road and that’s 4%. The loan amount would be $193,000 since you’re putting $7,000 down. So 4% of $193,000 is $7,720. Other expenses are prepaid costs and other cash reserves that average from $2,500-$5,000. In this example, I’ll do an average at $3,750. Add all these totals together $7,000 + $7,720 + $3,750 and that equals $18,470. Keep in mind that these numbers fluctuate depending on your situation and the location you are living. These numbers are based solely on averages. 

Keep in mind that when you are renting you don’t need to come up with all these funds. Typically landlords will charge you 2 month’s rent up front and that consists of the security deposit as well. Some landlords will charge you a monthly fee for pets, as they are putting the home at risk of wear and tear due to an animal living in the residence. Some landlords will make you pay for gas, water, and electric, and some won’t. The average gas bill in the U.S is $72.10, the average water bill is $70.39 a month, and the average electric payment is $110.76. Adding these totals together brings us to $253.25 a month on utilities. If your landlord covers these costs without up charging your rent, that is definitely a money saver for you. 

A lot of people when they think of buying a home short term instead of renting forget about the cost to sell the home. 90+% of homeowners use a realtor to sell their home. If that is the case, you will have to pay 6% commissions to the selling agent and the listing agent, 3% a piece. If you sell this home for $220,000, 3 years later, 6% commission takes $13,200 out of your profits already. That d0esn’t include transfer taxes, title and escrow charges, admin fees, wire fees, or any HOA fees you need to payoff before closing on the home if applicable, and of course your mortgage payoff which consists of your mortgages remaining balance after paying monthly for the last 3 years. 

Homeownership is an amazing accomplishment in life, but sometimes the numbers just don’t make sense. I know what you’re thinking “Andrew you’re a Realtor you should want people to buy homes” and you’re right, I love helping people find their perfect home to settle down in, but there’s always a time and place for renting. If you’re someone who is always on the move, renting is a way easier option, but if you’re wanting to settle down and maybe build some roots in a desired location, building equity in your home is a great decision for you. 

The median rent price in the U.S is a little over $800 a month, but I know what your thinking, where in the world can i find a rental for under $1,000 a month, and actually, you can in a lot of places. I this example, I am going to base it off $1,000 a month. Let’s say you find a home for rent that’s $1,000 a month but you pay utilities as well. Let’s bring up the average utility amount I calculated earlier of $253.25 a month. So you’re paying $1,253.25 a month for the next 36 months or 3 years. That totals $45,117. This will not account for any personal agreement you have between the landlord to cover the expense of maintenance or big ticket items. A lot of landlords will ask you to cover the first couple hundred dollars for the service call and inspection. Do yourself a favor and find a home that has good standing appliances and systems, so you don’t find yourself having to pay portions of repair on whatever dies on you. 

Let’s jump back and break down the expenses of purchasing a home. Let’s say you locked in an interest rate of 4% on a 30 year mortgage. Numerous mortgage calculators put these figures at a $995-$1,300 a month which accounts for taxes and fees, home insurance and mortgage payment principal and interest. Some calculators may be even incorporating PMI or private mortgage insurance, which is insurance you pay monthly until you reach 20% equity in your home. This will tack on another $30-$70 a month according to Freddie mac based on your down payment, loan term and credit score. Let’s say the monthly mortgage payment comes out to $1,150 a month + $50 of PMI totally $1,200 a month. This does not include utilities, so we will add the average utility cost of $253.25 to that which equals $1,453.25 a month.

You might be thinking, wow $1,453.25 a month is going toward my equity that is amazing, but in reality, your utilities and a portion of your mortgage payment isn’t going toward your home’s equity. Let’s briefly touch on what an amortization schedule is, it’s a table that breaks down each monthly payment based on your interest and principal.

Keep in mind you are also responsible for any and all maintenance on your home, as well as any DIY projects you want to take on throughout those 3 years to try and bring some more value to your home. Obviously a portion of your monthly payment is going toward equity and not in a landlord’s equity. 

With all this in mind, what is the better option for you?

Let me touch on some factors to consider before making a decision. The main one is doing research on the area or areas you are looking to live and seeing if the real estate market is stable and has a great outlook for appreciation. Obviously you’re not a magical guru that can see into the future, but you can look at trends from past years and see if it’s headed in the right direction. You can choose a home based solely on resale value instead of practicality to better set yourself up for selling. And one way to do that is by seeing what is selling quickly and at top dollar in the area, what are buyers loving in these homes? Can you afford to make a few changes to the home to cater to potentially interested buyers? 

One of the biggest questions that people think about in this situation is, wouldn’t it be better to buy a home even if you do break-even on the sale instead of giving a landlord $45+ thousand dollars over the course of 3 years and not getting that money back?

There’s so many factors at play, so that question isn’t answered as easy as it should be. Are you in a rush to get into a home? Buying a home is a lengthy process, from finding the home and hoping you don’t get outbid, to when the offer is accepted you have roughly 45 days before move in and that doesn’t include any occupancy if the homeowner requests it. Do you have the credit score and funds to put down on a home? 

If you don’t or you find yourself having the bare minimum of both, you might find yourself purchasing a home that needs a lot of work. If you have additional funds laying around or someone that can help you fix it up and sell it for more in 3 years that would be a great investment property for you, if the area is welcoming for a nicely redone home of course. If you have the funds and credit score, you could purchase a move-in ready home that won’t need a lot of work over the next 3 years and hope the value has increased substantially in your favor. 

At the end of the day it is your decision, but after listening to the figures and factors at play here, it’s obvious that purchasing a home adds a fairly thick layer of stress especially if you’re on a deadline.

You’d be taking a risk in buying a home for 3 years and betting on the real estate market that is always fluctuating to be perfect at the time you decide to sell. Risks are what create learning experiences and risks are also what make the rich richer. But If you don’t want to deal with purchasing a home, try to live well below your means in a rental so you can save up some cash so you can throw it all at a house in your desired location 3 years down the road. If I was able to find a house with good bones, great potential, and had the credit score and funds laying around to support it, I’d buy a home and look at it solely as an investment property and focus on doing projects that would up the homes value.

I have always been a person who loves the idea of flipping homes, so this would put me on a deadline to get it done. If you want to just live your life and not care about living situations and doing projects to up the value, just rent, it’ll be a lot less stressful and you can try and negotiate better terms with the landlord to better suit your needs. For example, I helped one of my clients get in touch with someone who is in the middle of remodeling their whole house, and we were able to negotiate terms that would lower my client’s monthly rent by offering handyman services to renovate those areas of the home for the landlord. It’s all about preference and negotiation. Please understand that the figures mentioned in this blog are rough estimates to help give you an idea of where your funds are going based on the option you choose. 

I truly hope this blog helps anyone who is torn between buying a home short term or renting. If you have any questions about this process, please feel free to reach out anytime. If you’re struggling to find a good way to save for a home, be sure to get your hands on my free home budget template to help you stay organized. 

Cheers,

Andrew McManamon

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