What is the own to rent ratio? At different times in the economic cycle it is sometimes more expensive to rent and sometimes it is more expensive to own. Even when the latter is the case, it is often still better to own. The ratio between the monthly expenses of owning vs. the monthly expenses of renting is what I am calling the Own to Rent Ratio. What is it right now? Let's find out. I decided to avoid the AI intervention and do so old school research. Using public sites such as Hotpads and Zillow I want to find out what the cost ratio between owning and renting is.
For most people the most difficult part of buying a house is the downpayment. The majority of loans issued to first time home buyers is an FHA product that has a downpayment requirement of 3.5%. There are a few other costs involved in purchasing a house as well. These up front costs are a burden to ownership. In the world of rentals typically the cost of entry is roughly 2.5 times the rent. That is much lower than the cost of entry for ownership. There are some who may qualify for a no down payment loan to buy a home, most notably is the VA loan which is available to veterans.
I have found both a current rental listing and a recently sold home in the Ogden neighborhood of Vancouver. Ogden is a very reasonably priced area in Vancouver, not the least expensive but slightly below the city median price.
Just a few months ago a house sold in Ogden for $459,000 it had three beds, two and a half baths, with 1700 SF on a small lot. I also found a current rental listing just a couple of blocks away for a similar home built around the same time with slightly less space at 1557 SF and also on a small lot. These are similarly equipped homes that would have sold for similar prices had they sold at the same time.
The rental house is listed at $2599 per month with $2599 required as a deposit along with a handful of typical fees. Cost of entry is about $5500 and $2599 per month on a one year lease.
The advantages of renting are the ease of moving should you not be committed to this area or that neighborhood. Generally maintenance is handled by the landlord. The renter is not obligated to make repairs unless renter was the immediate cause of damage.
The disadvantage of renting is that the rent can and most likely WILL rise over time. The renter does not receive any equity in the property. As the value of the home rises, the landlord benefits from that rise the tenant typically faces increasing rents. The tenant is usually unable to make any significant changes to the structure of the house and may be completely excluded from any changes including paint. When the tenant moves out the only thing they get back, and only if they met the lease agreements terms is the deposit(s) they made at the beginning. Upon exit tenant likely receives the $2599 deposit int he original upfront costs of entry. The particular home shown here had a rent escalation clause if you sign a lease longer that 18 months. That close was a 3.5% annual increase. So the rent would go up about $90 the first year and slightly more in each successive year.
So let's say you stay in that house for five years. You are a good tenant and get your full deposit back. When you leave the rent will be $2982 and you will have paid a total of $167,190 and will leave with $2599 returned. That represents a net cost for the use of the property of $164,591 over the five year period.
OK, how about a purchase? I found a very comparable home that is slightly larger at 1700 SF and sold for $457,000 in the latter half of 2024. This home is just a few blocks away with the same tax rate, schools, etc. This is a true comp. I could not find a house between 1500-1600 that was comparable in age, design, and location. This is the best comp and would likely have a similar rent if it were on the rental market. Maybe $50-$100 more at most. I'm using 459,000 as current price.
Cost of entry is higher. Using an FHA loan and buying the rate down at sellers expense, records show that a seller credit was issued on this property. Buyer used 3.5% downpayment along with another $1500 in upfront pre-purchase costs. (Inspection, Appraisal, etc.). Total upfront cost of $17565. Monthly payment including taxes, insurance, principal, and interest at a seller paid buy down to 6.675% (presumed 700 FICO score) is $3517.71 per month. Obviously this is a much higher monthly payment. Keep in mind if you have more down payment you can avoid PMI which in this scenario is $184 per month. PMI goes away after 132 payments and can be refinanced away likely at a sooner date. Refinancing is not always a good idea but that's another post.
Advantages to ownership. Owner gains equity in property. Owner will get strong boost in credit score over time maintaining a mortgage. Owner has more control over the property. Owner has options in the future after moving to sell or to keep property as investment. although taxes and insurance may fluctuate (up or down) the loan payment is fixed indefinitely.
Disadvantages to ownership. Owner is responsible for all maintenance and repairs on the property. Owner will need to keep property in like condition to maintain its value over time. When choosing to move owner may have to wait a bit to get property sold. Owner assumes risk of market decline and difficulty selling in that scenario. The longer owner remains in the house the less likely a decline will cause trouble.
Real estate values in Vancouver continue to see upward pressure, although the prices are settling into a more modest growth rate around 3% annually for homes in the this price and age range. We will use an assumption of 2.5% to remain conservative.
After five years the homeowner decides to move. It will take on average 45-60 days of marketing to sell the house. Seller can speed that up with a lower price if needed. The likely list price five years in the future at market value would be $519,000. We will operate under the assumption that the homeowner did not make any significant improvements to the property but did have some maintenance expenses that would not have been required in a rental scenario. I'll use $5000. That of course could be less or more depending on the random circumstances.
Owner sells house at full price but offers buyer a $7000 closing credit. Owner facings their share of closing costs, plus the seller credit back to buyer, and retires the loan on the home. Owner has paid the following over the five years: $219,462 in payments including PMI, property taxes, and homeowners insurance plus the cost of repairs/maintenance. The taxes and insurance all went up during the period and those increase are accounted for. The homeowner paid $145,623 in interest payments and $32,442 in principal. The loan balance is now $410,492. Homeowner also cost to sell including Washington State excise tax (1.6%) and a real estate commission of likely 4.75%. Obviously the commission is negotiable and may be more or less denying on the route the they went. After close the homeowner receives $476,044. Taking out the upfront costs and the payments plus expenses the homeowners cost to use the property for 5 years is -$42,987. The homeowner enjoyed the use of the property and was paid back $42,987 MORE than the total amount of outlays to own it. Yes they actually made a profit and since they lived in the house as primary residence they pay ZERO in capital gains taxes.
Buying is better than renting. Now if you choose to rent the house above and then take the difference and invest it in medium risk investments. (Real estate is considered a medium risk asset). Let's call it $900 a month plus the extra $12,000 upfront difference. What would that look like? Medium risk assets in the stock market with a small but significant amount of digital assets like Bitcoin would likely produce an 7% annual rate of return. Just like real estate these assets can and do occasionally lose value. If you did rent that house above and invest the difference in similar risk assets you would have this scenario: Total paid over the five years $221,190. You would have $81,269 in the investment account plus the $2599 deposit back for a total cost of the use of property of an outstanding $83,868. Keep in mind if you have the discipline to do this it is financially more rewarding.
The power of real estate is not its rate of return. The typical long term appreciation on residential real estate is about 5% annually. There are much better market assets for a similar risk that will get you 7% annually. Those assets however for ordinary Americans require a much larger risk of capital. If you want to buy $459,000 worth of stocks and bonds you have to lay out the cash upfront... ALL OF IT! If you are already wealthy you can buy on margin at 50% but that has a whole lot of its own issues and typically middle class Americans are not fishing in that lake ;)
The power of real estate is the ability to acquire a large appreciating asset with a minimal upfront risk. This concept is called leverage. The homebuyer puts up $17000 and gain the appreciation on a $519,000 asset that is free of capital gains up to $250,000 per individual and $500,000 per couple. Even at the paltry rate of 2.5% which I used in this scenario and is VERY conservative the real rate of return on the real estate is much higher than the stock market scenario above. Over short periods the rent plus investment model is better. Real estate is now and has always been a LONG TERM investment. The longer you own the real estate the less it costs to hold since interest on loans is amortized with the bulk paid up front. Even at today's mid level interest rates, leveraging a $500,000 appreciating asset for a 5% cost of entry is unattainable any where else in the middle class world.
