Search

Rent Vs Buy: As Multifamily Investors Should We Care?

ATTOM Data Solutions recently published its 2020 Rental Affordability Report which shows in 455 of the 855 counties analyzed, it’s cheaper to buy a three-bedroom home rather than rent.

“Renting is more affordable in 69 percent of the 136 counties with populations of 500,000 or more, and 84 percent of the 43 counties with populations of 1 million or more.”


As multifamily real estate investors, we must know our market. A real estate market could be subdivided into smaller submarkets whose characteristics could vary to that of the greater MSA. Take, for example, the Columbus, Ohio, MSA has a 6-year median home price change of 1.9 percent growth, while Eastland, a submarket, has a 12.7 percent decline during the same period. Over the past six years, Eastland has experienced a significant decline in both unemployment and rental vacancy rates while rental rates have climbed 7.2 percent. Furthermore, more than half of the submarket population is renters. While all of these economic variables seem favorable, we must consider from the housing demand perspective, people’s natural tendency to want better value. Therefore in the case of the Eastland submarket, household income has remained stagnant over the last six years; however, median housing prices have declined significantly relative to a large increase in rents. This could potentially move people away from multifamily properties into single-family residences. If you are contemplating a purchase in the area, you may need to rethink your projected roll-over risk (i.e. vacancy rates, rent increases, etc.).

Rent versus buy must be an apples-to-apples comparison. Directly comparing the mortgage to the rent would be imprudent as this is incommensurable. A more proper comparison would be consideration of the unrecoverable costs between the two. Rent in and of itself is an unrecoverable cost. Unrecoverable costs associated with home ownership will include:

• maintenance costs

• taxes

• the interest portion of the mortgage

• cost of capital

• insurance

• PMI ( if put less than 20 percent down).


Continuing our example using the Eastland submarket in Columbus, Ohio, we are going to make the following assumptions:

• Maintenance costs are 1 percent of property value annually ($100,000 home value) = $83 per month

• Taxes are $1,500 annually = $125 per month

• Interest portion of mortgage $156/month (total interest/360 payments)

• 3 percent x $20,000 down payment = $600/12 = $50 per month

• Insurance $1,200 per year = $120 per month

• PMI = $0

Total Average Monthly Unrecoverable Home Ownership Costs: $534

Average rent is around $771 per month.

When looking at both rent affordability and home buying affordability per unit of household income, buying would make more sense for residents in the Eastland submarket.

Rent affordability: $771 / ($38,169/12) = 24.2%

Home buying affordability: $534 / ($38,169/12) = 16.8%


A further decline in interest rates will serve to only widen the gap, making home buying even more affordable and renting less attractive. While there are a plethora of other economic variables driving multifamily rental demand, we must remember to keep an eye on submarket indicators pointing towards unfavorable trends for rent affordability and home buying affordability.


For a summary of the empirical findings by ATTOM Data Solutions and an interactive market map, use the following link below:


https://www.attomdata.com/news/market-trends/attom-data-solutions-2020-rental-affordability-report/


About the Author:


Dion Huey is a Key Principal at Delta Bridge Capital LLC which is a multifamily real estate investment company that invests in value-add apartment communities in the United States. He earned a master's degree in finance at Northeastern University in 2017 and worked on multiple business syndications as a financial analyst for Boston-based Plateau Asset Management which is a private equity search fund that has $30 million AUM. In 2017, Dion was an analyst on a deal team that advised Citic Investment Bank's Hong Kong private equity division on the syndication of a $1.5 billion acquisition of a hotel in New York. He is currently the host of The Multifamily Investor Situation Room Podcast.


In 2010 he co-founded Rocky Mountain Education and Technology Group which is a Beijing-based education services company that has serviced more than 5,000 clients. In his spare time, Dion enjoys reading, martial arts, lifting, and learning foreign languages. Contact the author at dion@deltabridgecap.com.


3 views

©2020 by MISR. Proudly created with Wix.com