The rent to income ratio is the monthly affordable rent as a percentage of monthly income. Ideally, tenants should keep it within 30% of monthly gross income. In some markets, in may not be possible because the shortage of available rental units. In these situations, tenants are required to spend more than 30%.
Let’s assume that a person/couple makes $100,000 a year which would be $8,333 per month. Thirty percent of their monthly gross income would be $2,500 which would be at the top of the ratio for their rent.
If they were to buy a $300,000 home on an FHA loan at 3.00% for 30 years, the total payment, principal, interest, taxes, insurance and mortgage insurance premium would be around $2,034 or almost $450 less per month than their rent.
If you factor in the monthly principal reduction and the monthly appreciation, assuming 3% annually, the net cost of owning the home would be under $1,000 a month. The people would be paying about $1,500 more per month to rent than to own. In a year’s time, it would amount to over $18,000 lost by renting which is more that the $10,500 down payment for an FHA loan and the closing costs.
|Rent vs Own Example|
|Mortgage at 3.00% for 30 years||$294,566|
|Monthly Payment … principal & interest||$1,241.90|
|Monthly Tax & Insurance escrow (estimated 2.25%)||$562.50|
|Total Payment (PITI + MIP)||$2,033.89|
|Less Monthly Principal Reduction||$512.50|
|Less Monthly Appreciation||$750.00|
|Plus Estimated Monthly Maintenance||$150,00|
|Plus HOA fee||$20.83|
|Net Cost of Housing||$942.22|
|Monthly Rent for Comparison||$2,500|
|Monthly Cost of Renting vs. Owning||$1,557.78|
|Annual cost of Renting vs. Owning||$18,693.30|
|Estimated Equity after 7 years at 3% Appreciation||$121,579|
One of the benefits of renting for tenants is that they are not responsible for the maintenance and repairs. At the end of the lease, they are able to move without having to dispose of a home. However, they also do not benefit from the increase in value due to appreciation nor do they benefit from the equity buildup due to amortization of the mortgage.
Disregarding the monthly net cost of housing in the example above since it considers both appreciation and amortization, the payment alone is over $450 less than the rent in this example. If you look at the cumulative results, the down payment, or initial investment, of $10,500 grows to $121,579 in equity in seven years. The owner of the home, in accepting additional risk, reaps the rewards of the equity as well as the lower cost of housing.
In the case of a tenant, their landlord will receive the benefits of the appreciation and the equity buildup. Whether you rent or buy, you pay for the house you occupy…either for yourself or your landlord.
To plug in your own numbers, go to the Rent vs. Own. If you have questions with the calculator or would like to visit about anything, give me a call (859) 647-0700.