January 11th, 2011 4:56 PM by Stephen McClain
Thank you for the opportunity to answer an age ol' question. Actually your question is two- fold. Your specific question as it relates to a specific property in a community and the general question of Ownership vs. Renting.
1st. Question: Answer- Economics (Supply & Demand) and the forces surrounding it. As the housing market has softened over the last 2 years due to most specifically tighter credit/lending practices more people have been forced to rent as opposed to buying a new home. This drives demand up for rental properties thus driving the rent values up as well. It has been good times recently for landlords. The landlord is reaping the benefit of ownership and the positive cash flow on their money (investment). Their money is making them money. Your money is well, making them money and not you money. So why are house payments less than rent? With a mortgage payment you borrow x and pay interest on x which is amortized over a certain time period thus creating a lower payment especially in government lending programs where the interest rate (cost of money) may be lower than average. You simply are re-paying a principal amount plus the cost of borrowing that money over time. The rental rate (payment) takes the previous statement into account and then adds to it a profit (cash flow) based purely on what the landlord can get on a specific property in a specific area at a specific time period.
2nd. Question: Answer- Core investment rules just do not change. Your money can work for you or for someone else. If you pay rent each month you might as well take the money and throw it in the street in terms of any return. You lose out on:
1. The growth of your money (Equity)
2. Tax Benefits
3. Interest Deductions
4. Ownership Benefits
You give all these up to someone else in a rental situation. If there is any way you can qualify for a mortgage you are always better off owning vs. renting. We all work to hard in today’s world to throw away our money.
Stephen B. McClain is a licensed Real Estate Broker and owner of Cornerstone New Home Solutions located in the Austin, TX area. He is also a certified instructor for the Texas Real Estate Commission. He has been involved in Real Estate and New Home Construction for over 25 years.