Trulia.com continues to do analysis to determine if it is cheaper to buy than rent within major US markets. For Q2, 2011 they have determined that the Twin Cities market, including Dakota County, are good markets to consider buying a home instead of renting.
Trulia’s Methodology
Trulia uses a methodology where they compare the rent of a 2 bedroom apartment, condo or townhouse to the median list price. Here’s how that looks -
Sample Price-to-Rent Ratio Calculation:
- Median List Price: $140,201.37
- Median Rent: $1,871.65
- Price-to-rent ratio: $140,201.37 ÷ ($1,871.65 x 12) = 6
Definitions:
- Total costs of homeownership include mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase and ongoing HOA dues and private mortgage insurance, where applicable. It also includes an offset for the tax advantages of homeownership, including mortgage interest, property tax and closing cost deductions.
- Total costs of renting include rent and renter’s insurance.
Based on their analysis, the Twin Cities market has a price to rent ratio of 13 and they define anything less than 15 as being better to buy than to rent.
Buy vs. Rent Example
Instead of relying on just median numbers I thought I’d try a specific example. I chose to use a 2 bedroom townhouse example in Rosemount since I own one of them as a rental and know the specific rents & costs involved. I then found a really good buy vs. rent calculator on Yahoo.
On the rent side I plugged in the exact rent I charge for my rental as it is a market rate. I then looked up sold townhouses in the last 4 months in the same development to find an average purchase price. I even plugged in a purchase price that was $30,000 more than what some of the townhouses sold for to adjust for the fact that some of those sold were bank owned properties and it might be better to compare buying a traditional home. Here’s what the calculator shows -
As you can see, over the 5 years that I ran the comparison it is WAY less expensive to buy a home instead of rent. Of course rents in Dakota County can vary so it’s a good idea to use something like Craigslist to do research on the best numbers to plug into the calculator for a fair comparison.
Assumptions
To be fair, here are the assumptions I used -
- Rent would rise 3% per year – with vacancy’s at a really low rate right now that’s certainly possible
- The home would appreciate in value 2% per year – that seemed reasonable, especially if you buy a bank owned or short sale property
- You bought with a FHA loan so you put 3.5% down for 30 years
- I used a 5% interest rate which is higher than the current rate but helps account for the PMI on an FHA loan
- Added $1,000 a year for ongoing maintenance costs. Since the townhouses in my comparison are only 5 years old that seemed reasonable
- Homeowner is in a 20% marginal tax bracket – might actually be on low side but assumes you itemize deductions
- Inflation rate of 3.5%
Of course you might argue a little with my numbers but the savings was so dramatic that I think that buy would win out in almost every scenario no matter how you play with the numbers.
Why Rent
Now there certainly can be some legitimate reasons why you would want to rent instead of buy including -
- Poor credit score so you can’t qualify for a loan
- No downpayment – you need to get 3.5% for a downpayment on an FHA loan
- Unsure of your situation – if your life situation is unstable as far as living location and future plans you may not want to commit to a permanent location
- Expected short term change – if your time horizon is short, like 1-3 years, before you expect to move again it may not make as much sense. One thing this doesn’t take into account is closing costs and selling costs once you decide to move.
Conclusion
We are at a convergence of situations that may be providing a great time for people to buy, if you can. Home prices are significantly lower than they were, interest rates continue to be attractive and rents are edging upwards.
If you are considering whether now is the time to buy a home in Dakota County or you should continue to rent instead please feel free to contact me at any time and I’d be happy to run through the calculations with you.
Bill Wallace is a Realtor at RE/MAX Results in Apple Valley, MN with a focus on Dakota County and the Southern Twin Cities including – Apple Valley, Bloomington, Burnsville, Eagan, Farmington, Inver Grove Heights, Lakeville, Mendota Heights, Prior Lake, Richfield, Rosemount, Savage, Shakopee, South St. Paul and West St. Paul.
