Rent or buy in Reno’s hot housing market — or any market for that matter?
The rising cost of housing in the last few years is making home ownership a tough proposition for Reno home buyers. We look at what’s fueling the Biggest Little City’s housing crisis and potential options for people looking for a new place to call home Jason Hidalgo/RGJ
It’s one of the classic debates in every hot housing market: Should you rent or buy?
It’s also a question with a classic answer. It depends.
With area home prices setting record highs this year — the median price in Reno has been hovering in and out of the $400,000 mark since March — figuring out whether it’s financially better to rent an apartment or buy a house is a prospect that confronts anyone mulling homeownership.
Further complicating the debate is that record home prices are being accompanied by record rents as well as near-zero vacancies for apartments in the Reno area.
“With single-family homes setting new records, it’s no surprise that rents are at an all-time high,” said Greg Peek, president of property management firm ERGS Properties in Reno. “Rental markets follow housing markets. It’s just pure economics.”
Although the answer between renting or buying can change depending on your budget, job status and personal circumstances, there are a couple of things that typically hold true for both.
Renting an apartment more affordable short-term
As a rule, renting is less expensive up front, Peek said.
Depending on the type of apartment you’re renting and price of the house you're considering, renting is typically the more affordable option for the first few years. Even with security deposits thrown in, paying for an apartment is still less of a financial lift than buying a house. The typical down payment for a $390,000 house in Reno, for example, can range between $39,000 to $78,000.
“It’s a lot of work to be able to save up a down payment of 10 percent or 20 percent,” Peek said. “It takes a while to do it, it takes a lot of dedication to do it and, more importantly, it takes a lot of discipline.”
Renting also does not come with some of the costs associated with homeownership. These include paying to fix things that normally break down over the course of owning a house.
“There are obviously maintenance costs and you have a segment of the population that just don’t want the headaches or responsibilities of homeownership,” Peek said.
At the same time, Peek says he is still a strong supporter of homeownership. Although buying a house is the No. 1 reason why tenants leave his company’s apartments — relationship issues are No. 2 and job transfers or leaving the area is No. 3 — Peek believes homeownership is an important facet of every community.
“We support people buying houses because it’s an investment in the community,” Peek said. “Homeownership builds stronger communities because people are putting a stake in the community they live in.”
This brings us to the second constant in the rent vs. buy debate.
Buying a house is cheaper over the long run
Although renting an apartment is the more affordable option up front, houses typically catch up on the value proposition after the first four or so years and then build wealth onward.
As a point of comparison, here are the average rents for Reno-Sparks during the second quarter of 2018, according to real estate consulting firm Johnson Perkins Griffin:
- Studio: $781
- 1 bedroom, 1 bath: $1,170
- 2 bedrooms, 1 bath: $1,210
- 2 bedrooms, 2 baths: $1,475
- 3 bedrooms, 2 baths: $1,754
- Townhouse: $1,508
For one example, let’s look at a $389,000 house in the city of Reno, which would be comparable to a three-bedroom, two-bath apartment. Assuming a:
- 30-year FHA loan at 4.25 percent
- 20 percent down payment
You will break even in your fourth year with a monthly average cost of $1,641 compared to a three-bedroom, two-bath apartment renting out at $1,754 according to Nerdwallet.com’s Rent vs. Buy Calculator.
Even when compared to the cost of a two-bedroom, two-bath apartment — which is typically the most popular apartment segment — you should still break even by year five. Lowering your down payment to 10 percent extends your break even point to five years compared to a $1,754-a-month apartment and eight years in comparison to a $1,475-a-month apartment. Otherwise, buying a smaller house or a condominium also is an option to lower the cost of homeownership.
One thing that might require adjustment of those calculations is your property tax bill. But it still would be a minor adjustment overall, said Cory Henderson, branch manager for Mann Mortgage in Reno.
“What (a lot of people) don’t take into account is the appreciation and tax benefit,” Henderson said. “At the end of your break-even point, everything is a net gain for you.”
Houses also are tangible assets that remain the prime wealth-building tool for most Americans, Henderson said. The only exception involves events such as the housing crash during the previous recession. Although recessions come in cycles, however, events at the scale of the 2008 real estate collapse, which was driven by creative financing, are typically rare, according to Henderson.
“That was like a 100-year flood,” Henderson said.
To recap: rent or buy?
Once again, it depends on your situation.
If you’re only planning on staying in an area for a short amount of time, for example, you’re likely better off renting from a cost perspective. If you don’t want to deal with the maintenance involved with owning a house, then it’s likely better for you to just rent an apartment as well.
“We have a lot of people who live with us who could very easily buy a home but they simply don’t want to,” Peek said. “They have a different view of homeownership for whatever reason. It’s not right or wrong, it’s just their view of it and that’s OK.”
If you plan on living in an area for a long time or perhaps have kids and want the stability that a house can provide, then homeownership becomes a more viable option. Given the cost savings over the long term combined with appreciation, it just makes more financial sense, Henderson said. If you do decide you want to buy a house, make sure you explore all your options thoroughly and seek help from a licensed professional.
Even issues such as down payment and credit score might not necessarily be as big a deal as some people think, Henderson added. Typically, you’ll have to have “a very, very bad credit score for it to make a huge difference,” Henderson said. Henderson says he has seen cases where paying off credit card debt or simply saving $5,000 helped people get approved for a mortgage.
“People go, ‘Oh, I have a credit problem,’ when in reality, they don’t have a credit problem or go ‘Oh, I don’t make enough money,’ when in reality, they do actually make enough money,” Henderson said. “Their biggest fear is just not knowing and it becomes this mental block for them.”
A lot of time, a mortgage professional can help prospective homebuyers find a solution to their problems, Henderson said. There’s one issue where they might not be able to help as much, however, at least in this particular housing market.
“Inventory is a bit of an issue,” Henderson said.