(continued from previous post)
Why rent when you can buy?
Often the lack of a down payment, or a down payment that is small, compels the need for Private Mortgage Insurance. Sometimes it is the need for flexibility such as the ability to move and not be locked into a mortgage. There are a myriad of reasons not to buy, not the least of which is lack of money for the down payment and for ongoing property maintenance. With the upcoming changes in the mortgage market, financing a house/condo is likely to become more difficult and this upcoming change may also be spurring an interest in investment properties as addressed in the previous blog post.
In the previous post I addressed a $139,000 condo purchase. For a buyer with a 10% down payment and a 4.5% interest rate on a $125,100 mortgage for a payment of ~ $519, plus PMI of around $100 and taxes and condo fees of $580 combined for a payment that is almost equal to the landlord; but with benefits as well as risks.
The benefits include the mortgage interest deduction and being locked in to a payment that will only go up relative to condo fee and taxes. An intrinsic benefit is also that of being able to remodel, and even rent if the need arises. Pitfalls could include a market that declines in value, wiping out the small amount of equity; or like with the landlord scenario, too many rental properties in the project. Association fees could rise to a level where they are no longer affordable, and the owner is locked into a payment that may become too difficult to manage. Capital expenditures such as the need for exterior maintenance (roofs, siding, street paving, etc.) could come in the form of a high special assessment, further reducing the affordability. By renting, the tenant has the flexibility of simply picking up and moving if the financial burden is too great whereas the owner does not have that same flexibility.
A concern from the standpoint of the appraiser is that the market may be starting to repeat itself. The run-up in the market in 2002-2005 seems to have been driven largely by speculation in real estate, and therefore this increased push to buying properties as rentals is reminiscent of the prior run-up, and the fact that in 2013 over 32% of MLS sales in an area were purchased for rental purposes, gives me pause to wonder if we are taking that same direction again. This brings me to a future blog post: is history starting to repeat itself?