This is the next post in my series discussing why home ownership for the Millennial generation is not as far fetched of an idea as one might think- at least in the Dayton Metro Area. My previous article discussed several government programs that are specifically tailored to assist buyers with lower credit scores and a limited ability to make a down payment. In this article, I will explain why there are some instances in which it is actually more expensive on a monthly basis for an individual to rent a home, rather than purchase one.
According to Rentcafe the average price of a two bedroom apartment rental in Dayton, Ohio is $785, up 2% from last year. In a previous post, I pointed out that there are a number of two bedroom starter homes for sale in Dayton right now, for under $100,000. At this price point, it is more than possible to buy a home in which the mortgage payment is less than what it would cost to rent. Don’t believe me? Let’s investigate further.
The monthly mortgage payment on a Dayton area starter home is often less than the cost of rent
I went to Zillow and looked up what is for rent right now in Dayton’s 45420 zip code. Based on current availability, it looks like a two bedroom, one bathroom home is renting for about $750 a month right now in Belmont. Assume that there is also a $750 security deposit and the total move in costs will be $1,500. This means that for a one year lease, a renter will pay $9000 total rent for the year plus the $750 security deposit.
Now, let’s compare that to what it would cost to buy a similar home in the same neighborhood. I searched the MLS for the latest homes for sale in the 45420 zip code, and an average price for a two bedroom, one bathroom home is about $80,000. If a buyer took out an FHA loan, they would be required to put a minimum down payment of $2,800. The estimated cost of annual property taxes today are about $1,500, and you will spend roughly $1,000 a year in homeowner’s insurance. Let’s be conservative and say you get locked into a 30 year fixed rate mortgage at 4.5%, and a buyer for this property would have a monthly mortgage payment of $660.63. (Go ahead and check my math, or make your own mortgage calculations with the FHA Mortgage Calculator). In other words, a buyer would have a lower monthly payment than a renter.
Young Dayton home buyers should consider all financial implications before making a housing purchase
Of course there are pros and cons to buying versus renting, and the right decision won’t be the same for everyone. In the above example, while the monthly mortgage payment is about $90 cheaper than the monthly rental payment and there are more up front costs. The upfront cost of moving into a rental is only the first month of rent plus a $750 security deposit. The up front cost to buy a home is a down payment of at least $2,800. In addition to that cost, a buyer will also have to pay for their own home inspection and their housing appraisal. These costs can add another $750-$1000 to the upfront costs of buying a home. Once you own the house, you are also financially responsible for the maintenance costs and upkeep, unlike a rental, where if something breaks, the landlord is in charge of fixing it.
The pro of buying versus renting, is that there is more security. If you take out a fixed rate, 30 year mortgage, the principal and interest portion of your monthly payment will never change. As opposed to if you rent a house or apartment, your rent can be raised at the end of every lease. The other pro to buying is that you are putting your money ‘towards something’ and building equity in a home. You are now the owner of an ‘asset’ – meaning that the market value of your home can increase, you may be able to sell for a profit in the future, or, you have the option to rent your home out if you wish.
So, how can a young person who needs housing decide which choice is best for them? One of the best questions to ask is how long are you planning to stay in the area? Many adults in their twenties or early thirties are hesitant to buy because they do not know exactly where they will end up. But your first home does not have to be your ‘forever’ home. In general, experts recommend the ‘five year rule’– meaning if you are planning to stay in one place for at least five years, you can come out ahead. Many adults on a tight budget also worry about the possibility of taking on a large maintenance issue if something goes wrong with a home. Asking a seller to provide a home warranty can provide new home owners a great amount of reassurance in the first year they own their home.
If you are considering the benefits of home ownership versus renting, make an appointment with a qualified Realtor to discuss the process. I assist Millennial buyers in finding a home that is a good fit for them, and within their budget, throughout the Dayton area. I also service Beavercreek, Centerville, Clayton, Englewood, Oakwood, Fairborn, Harrison Township, Huber Heights, Kettering, Miami Township, Miamisburg, Riverside, Springboro, Trotwood, Vandalia, Washington Township, West Carrollton, and Xenia.
Disclaimer: Nothing in this article should be taken as investment advice. The information contained in this article is only the personal opinion of the author. Any investment related decisions should be discussed with a investment professional.