How to Decide Whether to Rent or Buy a Home in an Expensive City

How to Decide Whether to Rent or Buy a Home in an Expensive City

It is both financial and emotional factors that will influence your decision to purchase a home.

 

One of the hats that I wear is homebuyer educator.  I teach first-time homebuyer classes through my city’s home center.  I have been teaching Homebuying 101 for over a decade and at the beginning of each class I look out over the faces of 40 current renters who are eager to buy their first home.  Heck, I was one of those faces in 1999 when I took Homebuying 101 with the instructor who ended up becoming my boss on this contract (and as an added bonus she has become a really good friend!).

My Storied History with Homeownership

I have been in the home ownership game for nearly two decades.  When I bought my first home in 1999 – a 625 sq. ft. one-bedroom condo – I felt that I had to stretch my budget to find the home that I wanted to live in.  And to be specific, I stretched my budget from $110,000 to $115,000.  And while my mom thought that it was crazy that I was buying a condo (though she didn’t share her feelings with me at the time) I went on to sell said condo for $230,000 five years later when I married my husband and together we bought a two-bedroom condo (yup, another condo).  So you could say that the home-buying gods have smiled upon me.

It is 2018 and the prospective homebuyers who sit in my classes do so with more angst, as housing costs in Boston have utterly exploded in the past 20 years.  Back in 1999 people trying to rent a two-bedroom apartment in Boston were most likely to pay about $1,500.  Those who hoped to buy in greater Boston were looking at median home prices of about $200,000.  Fast forward to 2017 when a two-bedroom apartment went for around $2,900 and the median home price was about $450,000.

Housing Then Vs. Now

Let’s makes these numbers a little more real:  Back in 1999 to afford the average apartment you needed to make about $60,000 and to own you needed to make $50,000 (along with savings to cover down payment and closing costs).  In 2017 to afford the average rent you needed to make around $120,000 and to own you needed to make about $93,000 (and again have savings for down payment and closing costs).  In 2016 the median household income in Boston was around $82,000.  This means that more than half of Boston’s residents did not make enough to either rent a new apartment or buy in the city.

What is the Cost of Homeownership, Really?

Folks, I am not sharing happy news with you.  Housing in big cities is expensive, any way you slice it. 

While on the surface it might appear to be cheaper to buy rather than to rent, remember that you need to bring savings to the closing table in the form of down payment and 2-5% closing costs. Luckily many states offer low down-payment mortgage options, such as the one offered by Mass Housing whose down payment requirement is 3%.  A 3% down payment plus 3% closing costs on a $450,000 home is $27,000.

Owning also brings with it the additional expenses of utilities and upkeep.  Utilities include electricity, heat, internet and water/sewer and can run about $400/month.  I tell students to anticipate keeping 1% of the home value in a savings account to cover the costs of home repairs that seemingly come out of nowhere.  For a $450,000 home that is about $4,500 a year, or monthly savings of $375 on top of a PITI (Principal, Interest, Taxes, Insurance) of $2,125.  All told that makes the monthly cost of owning about $2,900. 

Coincidentally that is about the same price as renting.

How Do You Choose?

So let’s get back to the original question:  How do you decide whether to rent or to buy in an expensive city?  We now know that renting and buying are going to be about the same layout of cash on a monthly basis.  Ask these questions of yourself:

  • Is your job stable?

  • Do you have the needed down payment and closing costs?

  • What is your credit score? (Mass Housing requires a credit score higher than 660)

  • Are your existing debt payments (car note, student loans, credit cards) under control with monthly payments ideally within 5% of your gross monthly pay?

  • Are you planning to stay in your home for the long-term, meaning more than five years? Selling a home is a much more lengthy and complicated process than leaving a rental, when you can move at the end of a lease or maybe even rent on a month-to-month basis.

For more detail about preparing for home purchase, see the related blog post 4 Steps to Successfully Qualifying for a Mortgage.

Some like to talk about housing being a sound financial investment, and many times this is true.  But in the end purchasing housing is about creating a home for you and your household and strengthening ties with your chosen neighborhood and community.  This is the place where you will celebrate birthdays and anniversaries and maybe care for ailing family members.  This is the place where you might stand in the street with your neighbors after the electricity goes out or after a big storm passes.  This is the place where you might attend community meetings to advocate to your local government on issues like traffic and safety. 

Yes, a house is a financial investment, but it is also your home.

What are your thoughts?  Do you want to purchase a home in an expensive city?  Have you done so?  Share your thoughts below!

Talking About Money Book Club:  Braving the Wilderness by Brené Brown

Talking About Money Book Club: Braving the Wilderness by Brené Brown

Talking About Money Book Club:  Dollars and Sense by Dan Ariely and Jeff Kreisler

Talking About Money Book Club: Dollars and Sense by Dan Ariely and Jeff Kreisler