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How to advise your clients when they ask, “Should I rent, or should I buy?”

2019-04-11T12:06:13+00:00

April 10, 2019

Students in our real estate pre-licensing classes often say that one of the reasons they rank Garden State Real Estate Academy as South Jersey’s best real estate school is that we not only teach them how to pass the state exam on their first try; we also give lots of advice on how to jump-start their real estate career.

A New Realtor’s® First Steps.

You have just spent hundreds of dollars on real estate school, exam and criminal background check fees, state license fees and the mandatory fees to join the Realtor® association, local MLS, etc. It is important to start recouping some of that money!

We suggest two ways to start earning commission:

  • Ask experienced agents in your office if you can sit open houses at their listings. This will expose you to many opportunities to meet and develop rapport with potential buyers and sellers.
  • Many top agents don’t want to waste their time with renters, so ask those agents if they would offer you the opportunity to take care of calls that they receive for rental properties: perhaps enquiries for properties already rented, but where leads continue to come in.

Buying or Renting? Which is the Better Option?

The first step you should take with any client is to have a consultation. They are looking to you for expert advice, and the right guidance could save—or cost—your clients thousands of dollars. Sure, you will make a larger commission if they buy a home through you rather than rent one, but remember, your thoughts should never be about your commission, they should always be solely focused on what is best for your client.

Questions that can help you understand whether to advise on renting or buying would be:

  • How long do you expect to stay here?
  • What is your credit report like?
  • How much do you have available for down payments, closing costs, etc?
  • Have you discussed your options with your attorney and tax advisor?
  • At this point in your life, how important is your financial goal to accumulate money in your investment/savings portfolio?
  • Considering your lifestyle and employment situation, do you feel comfortable with having the long-term commitment of a mortgage, or do you prefer the flexibility of being a renter so you can travel, etc?
  • Are you comfortable with having risks such as repairs and maintenance that come with owning a home, vs being a renter, where those are the landlord’s problems?
  • What is the current availability of rental properties and homes for sale that meet your needs?
  • Are the current housing trend prices in your areastable, increasing, or decreasing?
  • What is your income tax bracket?

What About the Money?

As a Realtor®, you should not give tax advice. Leave that to the professionals. However, it will help you to better serve your clients if you become familiar with the basics of what tax deductions and credits apply to clients who buy and rent their homes.

If you don’t have the ability to do a rent vs buy analysis yourself, consult with your trusted mortgage loan officer and he or she can probably provide you with a printed analysis of the benefits of each, personalized with your client’s answers to the above questions.

How does a Rent vs Buy Analysis Look?

For this example, I have chosen a townhouse in Mount Laurel that has $6,500 in property taxes and could be purchased for $214,000. Additional assumptions are that property insurance is $850 annually, annual maintenance is $1,200, the buyer puts 10% down and obtains a 30-year mortgage at 4.25% APR. The home appreciates at 3% annually and the client holds it for seven years and then sells the home, incurring commissions and closing costs of 8% of the sale price.

The rental comparison is for an identical townhome that is rented at $1,850 per month, with 3% annual rent increases for the same seven-year holding period. I am also assuming the tenant had the same amount the buyer used for down payment and closing costs, but that he invested those funds in a vehicle that appreciated at 4% annually.  I have added tenant insurance of $25 per month. Utility costs have not been included, as these would be the same, regardless of whether the client rents or owns the home.

In this hypothetical situation, the ownership vs rental costs are almost the same: $2,111 per month as an owner vs. $2,199 for a renter. If the client planned to stay in the home for three years or less, it would be advantageous to be a renter. But if he planned to live there for longer than three years, the numbers show a strong shift in favor of the client buying the home. In fact, the person who rented for seven years versus the buyer who then sold after seven years, using the above assumptions, would have paid almost $14,000 more in housing costs.

Here is how the Rent vs Buy Analysis looks:

Cost breakdown, Years 1 through 7
BUYING RENTING
Initial costs $29,960 $1,850
Yearly costs over Year 1 – 7 $193,780 $172,318
Lost opportunity over Year 1 – 7 $28,848 $18,342
Selling costs $187,748
Total costs over Year 1 – 7 $439,916 $192,510
Cash from sale of home $263,194
Rental deposit return $1,850
Total net costs Year 1 – 7 $176,722 $190,660
Average monthly costs, Year 1 – 7 $2,103 $2,269

David C. Forward is a licensed real estate broker and instructor and was first licensed as a Realtor® 30 years ago. He is School Director of Garden Real Estate Academy, has won numerous awards for real estate sales, is a much-requested public speaker who has addressed audiences on six continents and is the author of 14 books. David can be reached at David@GSREacademy.com