Should I rent or buy my home? On this episode, we’ll dive into several studies and look at your return on investment, time, taxes, cost of home renovations and more. Host Michael MacKelvie, wealth advisor, shares historical data, where we’re at today and what you should consider as you weigh the pros and cons of homeownership.

Transcript

Michael MacKelvie: So, about a year ago, I pulled up Zillow and I noticed something strange, something very strange. I was moving and I was looking at buying a house in Seattle. I was going to sell my house, but I couldn’t help but notice that the pricing between renting and buying seemed off. So off that, well, I knew that I eventually wanted to do an episode on it because the prospect of investing in real estate will always be around, and clients, folks, will always be interested in whether or not they should invest in real estate. That’s what we’re here to talk about today.

My name is Michael MacKelvie. I’m a certified financial planner with Mariner, and the first conversation, I think, that always pops up or at least point of the conversation on this topic, things have changed. It’s different now than it used to be. Millennials are very quick to point that out to maybe their boomer counterparts. But if we look beyond just that point of, hey, things are different now, one ratio that I have found extremely helpful and I found in this journey for myself of, okay, should I buy a house, should I invest maybe in some property, is the mortgage-to-rent ratio. It compares the average monthly mortgage to the average monthly rent. It’s not an end-all be-all that’s going to tell us everything. But it’s extremely helpful, especially if we look at where we are today compared to the past. And again, many folks are curious about investing in real estate. So they maybe look at the past and maybe look at where we are right now, and they look at these types of ratios, or at least they should consider something like this. And I get questions all the time.

So some data from CBRE on this. Looking at this mortgage-to-rent ratio, it is 52% higher than the average apartment rent right now. That is, mortgage payments are 52% higher than the average monthly apartment rent. That is extremely high, historically. If we look back just over the past, mortgage payments have typically been in line with what rent payments are. So, this is not normal. Again, not normal. Mortgage payments have increased with taxes by about 75% since 2019. So rents have increased, but mortgages have trounced this increase. This is data from CBRE. I actually saw this article also recently published in the Wall Street Journal. So, this data can be found in many different places.

Again, this is not normal, but it’s also important to understand that real estate is very regional. That’s nothing new, but let’s just look at some facts here from CBRE as well. If you look at the mortgage-to-rent ratio in the city of Seattle where I live, it’s 2.5. That’s very high. So, if your average monthly mortgage in a great scenario was $2,500, your rent would be $1,000. Elsewhere though, the national average, since it’s about 52% higher, you’re typically seeing about 1.5 times multiple. So, if your rent was $1,000, you could buy the same piece of property or condo, let’s just say $1,500 roughly a month.

So again, this highlights the changing bond that we have with the ground beneath our feet because this has just changed over time. Typically, these two numbers are in a line. Right now, it’s a lot less expensive relative to buying to rent a house. That’s important for investors as well as people that are just deciding, okay, should I buy versus rent? So, how have people responded? Another number on this, the number of households rented by people making over $150,000 in the U.S. spiked to 3 million between 2016 and 2021. That is a staggering 87% increase, and that’s before we saw this massive jump in interest rates. That’s before we saw this massive jump just in general for housing, obviously what happened with inflation and the interest rate response that we saw there. So, more people are choosing to rent instead of buy is all this means a lot more. These are people that typically, at least historically, had money to buy. If they’re making $150,000, and again, this is to 2021, $150,000 even in 2021 was a lot different than $150,000 in 2024.

So, how has this looked over time? Again, we’ve looked at this mortgage-to-rent ratio and how that’s changed over time. We talked a little bit about how now more people are choosing to rent versus buy. What about just home ownership in general? How has that looked over time? I think the general thought is that, well, yeah, more people maybe own today, but yeah, if we look way back, everybody could just buy because it was so cheap to buy that if we look a century back, 150 years back when land was a few cents or free, more people own their land than today. I actually read this book, American Property by Stuart Banner, and there’s a couple in this book that I think highlight this belief too, not just today as far as people looking back and thinking, well, everybody could own land back then, but also the way that people believed land ownership was at that point in time.

Alexis de Tocqueville, this was in the early 1800s. “In America, land costs so little that each man becomes a property owner.” Observations like this were most certainly wrong. Some facts and figures, again, from this book American Property. In 1807, three quarters of people were renters in New York. Outside of the city, less than half of the households in Maryland owned their land. Okay? This kept land prices low, but it also kept rent low, and at the end of the 19th century, less than half of Americans owned their home. So this belief that maybe, yeah, everybody back then and the golden age or way back, everybody could own their home, that might be true for the boomer generation, the baby boomer generation, if we look to post-GI Bill. So maybe your parents or depending on where you’re at, your grandparents. But if we go back further than that, we can see that home ownership has changed significantly up and down over time.

So, yes, if we stay short sighted to just the prior generation, we can maybe see, yeah, home ownership was higher, but if we look further than that, it was significantly lower. Okay? So point being here is it has changed significantly over time. So that is an important fact to keep in mind if, again, you’re considering, okay, should I buy versus rent? Because we kind of have this obsession with owning our house. There’s been plenty of times in the past where people have not owned their home, and that’s been perfectly fine because it just made financial sense. But let’s set the past aside a little bit here, and let’s think of some popular arguments for buying today. So that’s the past. Let’s think about today. What are the popular arguments that come up? Rent will go up while your mortgage stays fixed and your home will appreciate over time.

Okay? That is, I think, the first thing we think of if we’re thinking about buying a house. Right? My mortgage is going to stay fixed, going to stay fixed if it’s a fixed mortgage. Rent’s going to go up. If I’m investing in real estate, I’m going to keep making money on that. Appreciation is also going to tack onto that. And if I’m looking at buying versus renting, my rent’s going to go up. The last few years, rent’s gone up significantly with inflation. A mortgage will just lock that in. Well, according to an article with the New York Times, homeowner tenure is around 13 years.

Why is that important? Well, we’re buying these 30-year loans, but if we’re only staying there, on average, for 13 years, the question is, okay, well what is that maybe break-even point? We’re not working fully into that amortization schedule to where we’re getting in the latter half and we’re paying a lot more towards principal. Those critical years when you maybe are a lot more likely to break even if we’re moving before we even get to that point, that is a key piece, especially again, if you’re considering buying versus renting, you have the money fortunately to maybe do both.

It makes it a lot harder for that investment property or primary residence to break even or pan out over time. So, I think an example helps on this because we can maybe wrap our heads around, yeah, that’s harder, but we don’t maybe fully grasp intuitively the numbers on it. So, I just want to rattle through an example here to look at renting versus buying. Just a quick example, and again, we’re just going to look at rent versus buy. We’ll get into the investment piece next, but just renting versus buying.

Let’s say you’re maybe looking at buying a house and you’re in Seattle where houses are more expensive. It’s a $1 million house. The monthly mortgage is $4,000. We’re just going to use the calculator you can find on Wall Street Journal. So, this is just the calculator on Wall Street Journal. It’s just math: 7% mortgage rate, 20% down payment. We’re going to assume that home prices will grow by 4%. We’re going to assume that rent will grow by 3%. We’re going to assume the cost of money is 4.5%. That is what you could get with your money elsewhere. A key important opportunity cost number, we’re going to assume that inflation is 3%. We’re going to assume that you have 1.35% property tax, a 20% marginal tax. Okay? You’re in the 20% marginal rate.

So, the question is, when will you break even with those assumptions? The break-even point with the assumptions that I just shared with you, the break-even point on that is 18 years down the road. Well, that’s five years beyond the average tenure for a homeowner. So that average tenure for the homeowner, if they move at 13 years with these current assumptions just fixed in this case, they are not breaking even. But here’s something else I wanted to highlight. This is really important for anybody that is considering investing or buying just how big of a difference 1% in the change of the appreciation rate can make.

So when you’re factoring in the assumptions, the most common feedback I get is, well, for example, Seattle sees above average appreciation. So, this doesn’t take that into account. So, we need to, in this case, increase the appreciation. So, if you increase the appreciation from 4% to 5%, the break-even point moves from 18 years down to eight, roughly eight years, it’s less than half 1%. If the appreciation is 3% instead of 4%, so let’s just say it’s less than 4%, well, the break-even point is now 37 years. Okay? So you’re not even breaking even within that 30-year span.

This is just math. This is just using the Wall Street Journal’s calculator online. Again, we don’t know what the appreciation will be over time, but some helpful pieces on just, okay, well, what should we expect? Well, if we look at the rate of return to everything, so this is just a study that was done that looked at actually by one of the credit, sorry, one of the Federal Reserve branches, I believe it was the California one. We’ll make sure to include that site in the description. It was a massive study that looked at long-term real estate appreciation. Real estate has only done slightly better than inflation. So, if we look very long-term at real estate, it’s only done slightly better than inflation. So, with caution, should you be considering tacking on additional appreciation to your expectations.

Now, this gets into how do we figure out if this is a good opportunity? How do I measure this? Sometimes people look at cap rate and they just solely look at the cap rate. That’s the capitalization rate of the property. That effectively determines the yield of the property. I think there’s limitations to that. It does not take into account debt, for example, for the property. So what your current interest rate and mortgage payments are going to be, it’s just going to help you understand what the yield of the property is. I think a better measurement is IRR. Anytime I’m working with a client, I help them understand what the internal rate of return from a projection standpoint is of that property. Now, that’s important because that allows you to figure out, okay, what’s my all-in return after expenses, after income from rent, and after some appreciation projection? What is my all-in return?

And, then, you can take that return and maybe compare it to alternatives, right? Because, well, that’s really important. You don’t want to just look at the return and assume there’s nothing else out there. For example, if your IRR is 4% and money markets are higher than that right now, maybe it’s not the most sound investment. So this is always something that I help folks calculate, and I think it’s really important if somebody is looking at investing in real estate is figuring out what return expectation. My favorite measurement for that is just IRR, internal rate of return. Okay?

Expenses are going to be different everywhere. Real estate is obviously so circumstantial. In California, I think property taxes adjust when you buy, for example. Whereas other places, property taxes will adjust at different periods. Maybe when you have just an appraisal, which might be longer than just being when you purchase it, but maybe you’re like my 24-year-old self and you’re like, “Okay, I get all this. I’m just going to fix the place up though. I’m going to put in the time to fix this up.” And maybe you’re like my 24-year-old self and 25 trips to Home Depot later, you’re starting to realize that there’s this thing called the planning fallacy. We expect our projects to take less time than they do. We tend to overestimate the value of these projects as well.

So another study that was done in this case cited by Investopedia, virtually every project fell below a full recovery. So for example, that kitchen remodel, on average, the recovery is about 74%. So, if you spent $10,000 on it, you got back $7,400 when you sold it. That gets kind of hard in our minds intuitively when we hold the house for five years and we’re like, “Yeah, we did this kitchen remodel for $10,000 bucks. We sold the house for $100,000 more than we bought it for.” Do you really know how much you recovered? This study looked at each project; they found that there was virtually no full recovery.

Now, if you’re an investor in real estate and this is your job and you’re going to do a ton of improvement to maybe a dilapidated property and turn around and double the property, and, again, you’ve done this for years, you understand that—that’s a different story. But what is required to do that? Time. If this is your profession, well, that’s time. Or, if you want to make this a side hustle, that is time. And what’s so interesting about this is everybody treats real estate as if it’s unique to giving you the opportunity to work. It’s like saying, I will work more and make more money. Of course, but you’re working more. Hopefully, that goes without saying.

But I think a lot of times, and I think back about my 24-year-old self, I’ll fix this up, you think, yeah, it’s just a little time on the weekend. It’ll be fun. Eventually, it maybe isn’t fun. It’s more of a job and it becomes more of just how do I grow this thing like an investment? That’s fine. It just might not be the best given the alternatives when you factor in time, and, again, that internal rate of return or it could be phenomenal. Again, it just depends. Real estate’s very circumstantial. But, as we just went through, a lot of these numbers where real estate is at today is different than maybe where it was at in the past.

A couple of other things that are also a little bit unique to real estate as far as if you’re buying these houses and owning them, you have this idiosyncratic risk, that is, you have to buy a house in a single town in a single state, and it’s a single type of asset being real estate. You can’t diversify the same way you can with other assets to where you can buy fractions or much smaller shares. Now, you can have real estate investment trusts, and that can be a way of diversification, but we’re talking about just personal ownership here. So, you kind of have to take on a large concentration risk depending on, I guess, your total net worth relative to everything else. But a lot of times you’re taking on a large concentration risk to do that. That’s important to also factor in here.

The tax benefits, I think, a lot of times in my experience that gets overstated. People think, “Well, yeah, but I’m going to get all these write-offs.” It reminds me of the business professional that I met that said she was leasing her Mercedes for the tax write-offs. You still have to lease the Mercedes, so it falls in line with the more you spend, the more you save. I find that a lot of people tend to overestimate the tax benefits of real estate. Obviously, there’s exchanging that can come into play if you’re investing in it, and that can be a powerful way, but we’re getting into more of it as a business at that point. You’re really going to be spending time if you’re getting into that elaborate of a project to where you’re maybe exchanging it into future projects. So again, there are tax benefits, but I find that at least when it comes to the primary home, people tend to overestimate what those tax benefits can be.

And that leads into the last piece here. This is a personal choice. This is the final argument that I hear a lot of times for folks, and I totally understand it. I completely understand a personal choice because you can’t take this money with you. So, sometimes we got to make these personal choices that just makes sense for our family or for ourselves. The problem is, I think sometimes people look at a home as if it is going to provide that source of happiness. And study after study has just shown that that is not true.

I think people automatically believe sometimes that buying a home will just lead to more satisfaction, more life satisfaction, and, again, I think that that’s just maybe incredibly short-sighted. Life changes frequently and often. So, if purchasing a house is going to financially stretch you, this personal choice of, “Hey, I got to buy this house because it’s going to make us happier” can become a financial one very quickly. Right? They bleed into each other to where it’s almost paradoxical to say, well, this is a personal choice. Well, if it becomes a large financial one that is crippling your family, is it still solely a personal choice that has nothing to do with your finances? You can see where they bleed into each other.

If happiness is what you’re after here in purchasing the house, you might be chasing something that isn’t really there. Now, some benefits of buying the house, obviously forced savings, this calculation of rent versus buy. We’re talking about if you were to invest the difference between renting and buying each month, that requires some commitment. The average person maybe isn’t going to do that. So, one of the nice pieces of real estate is it does force you to save. That is a wonderful benefit. So, again, I think there’s a lot to consider here.

The biggest takeaways that I would have in this current environment, whether you are investing in real estate, considering it, or you have an old primary that you want to make a rental now, or you’re wanting to maybe just go out and buy your first investment piece of real estate, or you’re just sitting there for the first time, you’re like, “Hey, I could be a first time home buyer or rent.” You really need to sit down and look at the numbers and understand that from a personal happiness trade-off, you’re probably not going to get a significant jump there, at least according to virtually every study that’s ever been done on that topic. The question, then, is financially what is the trade-off here? Given the alternatives? I believe the internal rate of return is one of the best ways to look at that. You then can take that and compare it to other investments. You also obviously have to take into account time, the time that you will spend on this.

But most importantly, I don’t look at rent as some temporary way station on the journey to the final destination of home ownership. Home ownership has changed over time significantly, and it will continue to change. So, it’s not this place reserved just for people that have enough money to do it, just like rent is not this place reserved for people that just don’t have enough money to buy. So, again, my name’s Michael MacKelvie. I’m a certified financial planner with Mariner. If you’re listening to this on Apple Spotify, YouTube, make sure to subscribe If you haven’t. You can get more industry insights from industry professionals. Thanks again for listening. Take care.

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