Part one of a series of three articles on renting versus buying.
We hear monthly, if not weekly, “This is the time to buy.” Our well-meaning friends tell us, “You should buy now because prices cannot continue to drop forever.” Our parents, most of whom have enjoyed a historic ride on the real estate inflation train, are even willing to help us buy a place and put a stop to our “throwing money away in rent.” Well, I am going to fully disclose that I have owned six houses and one condo for total of seven residences over the last 30 years (now that is some full disclosure). Since our move to Chicago, just five years ago, we have rented five different apartments or condos. We currently pay $550/month less than we did five years ago for an equivalent condo.
A friend of mine that is a real estate junkie is renting a condo that sold for $410,000 in November 2005. The owner, who was completely fabulous, injected a minimum of $30,000 of improvements in 2010. As a renter, he enjoys a great kitchen, spa-like bathrooms, beautiful floors and amazing closets, for a very reasonable $2,000 per month.
The owner’s alternative to being an absent landlord is to sell his condo. Sadly, Zillow estimates the condo at $287,000. Let’s assume he gets a shark of a realtor, gets lucky and can sell the unit for $350,000. He will need additional luck in getting the appraisal and the mortgage broker to agree on this price and that the buyers have a credit score over 700 and have a minimum of $70,000 as a down payment. Let say all the stars align and it is a done deal. What has been his reward or punishment on his slice of the American Dream? Since November of 2005 he has lost about $90,000 in value, $36,400 in real estate taxes, $45,100 in homeowners association dues and we cannot forget the real estate commission (these condos don’t sell themselves, so $21,000) for a total of $192,500, or $27,500 a year over a seven year period. Of course, this assumes he has paid not a penny in interest and he was never assessed one or more of those pesky not so special, “special assessments.”
The landlord has lost in value more than my friend would pay in rent and that assumes the expenses and the depreciation in values would stop. The renter has enjoyed living in this $440,000 investment risk free of any depreciation, maintenance and repair expenses, monthly or special assessments and can move anytime the circumstances of his life dictates. This is an example of the cost of ownership being much higher than the rental cost. Why would anyone engage in this financial hara-kiri? Nobody ever sets out to do this. The circumstances of the owner’s life changed and he had to move. The owner’s best option was to rent the condo versus selling the condo at a significant loss and allow him the option of coming back to Chicago and/or a chance of market appreciation. This story — with better or worse numbers — is repeated hundreds if not thousands of times throughout Chicago as we live in a mobile and ever-changing economy.
In summary, here are my Top 5 reasons for renting and sidestepping the whole “buying” experience:
1. Chicago housing prices continue to decline as a whole, due to continued foreclosures, short-sales and new inventory, while rental prices continue to decline. When we moved to Chicago in May 2007, a studio roughly 750 square feet at the Trump was $750,000. Lately, I have seen the asking prices in the $500,000 area, a 33% decrease.
2. The rate of inflation (the increase in prices for goods and services) is lower than the rate of interest on the average mortgage. Thereby, not allowing your home to appreciate faster than the cost of owning.
3. Property taxes continue to increase in spite of the property values declining. The cause is that cities and counties still need the tax revenue and are simply raising the rate of tax (millage) on the assessed values. I have another friend who just got his property tax bill. Although his assessed value is $100,000 less, a 20 percent drop from what it was last year, the property tax bill dropped by only 15 percent. By the way, the savings only happened after he hired a lawyer to contest the value and fight city hall. The attorney bill has not been factored into the “savings.”
4. For condo/coop owners, the homeowner association fees and maintenance costs continue to climb based on increased maintenance costs, vacant units and foreclosures. The last condo I rented, the owner had HOA of $837/month. When he bought the condo in 2006 for $350,000 his HOA were $537/month. Additionally, he has been charged two special assessments totaling just over $25,000. Maintenance costs continue to occur. I have a client that owns a beautiful home (mortgage free) just outside of Chicago. When they bought their home, it needed a new roof and they paid $25,000 for a new cedar shake roof. This year (20 years later), the house needed another cedar shake roof but now the cost was $90,000. Well, they got the new roof but not a cedar shake — this time, a new asphalt shingle roof for $49,000. Even though the condo or house is paid for, it still costs money to live there.
5. Life is unpredictable if you are paying attention. The purchase of a home, whether it be a humble studio apartment in Lakeview, a trendy-sophisticated condo/3-flat in Wicker Park or a McMansion in Barrington, all are longterm investment decisions. And by longterm, I do mean longterm. How longterm, you ask? If you cannot see yourself staying put for a minimum of 10 years, theb purchase is not the right option for you at this time.
This posting might seem pessimistic and a real downer. If you are one of my readers that is feeling that I have been a real buzz-killer, just hang on. Next week, I will give you my Top 5 reasons why you should buy now.
The opinions and recommendations expressed herein are those of Mr. Garrido and do not necessarily reflect those of the firm and are subject to change without notice. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. The information contained herein has been derived from sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be a complete analysis of the security, company or industry involved.
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