Buy vs. Rent

Rents across our Aloha state are nothing to say mahalo for. Hawaii has some of the highest residential rental costs in the country. With interest rates still in the 4% range, more inventory now available throughout the state, and mortgage interest still allowed as a deduction, why are most renters still renting? This week, let’s explore the perceived obstacles, and a case study of renting versus owning.

In all the surveys done with renters, the number 1 reason given as to why renters feel they cannot move into homeownership is a lack of a sufficient down payment. The public is so misinformed about this one critical point. Over half those surveyed believed they needed a minimum of 20% down in order to buy a home.

Myth #1 – Insufficient Down Payment:
If you still think you need a minimum of 20% down in order to buy a home, you are sorely mistaken. In the past few years many programs have been established that require little or no money down. Today there are loan programs available with zero down from USDA, 3% down from Fannie Mae and Freddie Mac, and 3.5% down from FHA.

Myth #2 – The Payment is significantly more than Renting:
With great mortgage rates still available today, and the skyrocket rents being charged, you would be surprised as to the small differential you will have between renting and owning. While the initial payment may be higher by a few hundred dollars, when you take into account your payment being fixed, versus ever increasing rent, plus the tax deduction, the differential is not as much as you may think.

Myth #3 – There’s nothing available in my price range:
While it is true that Hawaii has some of the highest real estate prices in the country, there are properties available at every price range. That doesn’t mean you will find a 3-bedroom house for $250,000, but in every price range, there are properties available – it just may be in the form of a condo versus a single family home.

I randomly picked a condo in the Salt Lake area of Honolulu for an example of how much better it is to own versus continuing to rent. I found a 2 bedroom/1 bath condo listed for $350,000 that seems like a nice starter place for a young family. I also checked to see what the comparable rent would be for units similar to the listing in the immediate area. Rents averaged about $2,100 per month.

The condo’s monthly mortgage, taxes, and HOA fees would cost $2,593 per month. The $2,100 rental condo, after including $20 for contents insurance and $100 for the State’s GET, comes out to $2,220. That’s a difference of $373 per month – or the average monthly car payment.

The example below shows the difference in the startup costs, but takes into account the appreciation and tax benefit over a 10 year period. The example shows you selling after 10 years AND paying 6% sales commission.

In the end, after 10 years, you come out ahead by purchasing a whopping $129,000.