Rent Versus Ownership - A Tallahassee Real Estate Case Study

Posted by Joe Manausa on Monday, February 18th, 2008 at 10:19am.

I would like to demonstrate why home ownership in the Tallahassee real estate market is the single-greatest investment that a family can make.
I have written numerous blogs that have looked at the performance of different Tallahassee Subdivisions and have concluded each blog article with how the average home appreciated from 1991 through 2007. The following table summarizes each Tallahassee neighborhood that I have reviewed lately:

As you can see, all of the neighborhoods have performed well. With appreciation rates from 4.5% to 7.5%, the Tallahassee real estate market has done wonderful. Loaded with this information, I would like to demonstrate why home ownership in the Tallahassee real estate market is the single-greatest investment that a family can make. It blows away the stock market, and for most families, it is by far the smartest investment that they can make. In order to perform this analysis, we will look at a fictitious family, living in a fictitious Tallahassee Subdivision, and will use these assumptions (which are typical of what we see in the Tallahassee real estate market): Assumptions
  • The family bought their home in mid-year 1991 and sold it in mid-year 2007
  • The neighborhood in which they purchased experienced a 5% annual appreciation rate
  • They purchased a home that was roughly equal to the median home value in 1991 for $90,000
  • They financed the home with a FHA loan ($85,500 at 7% for 30 years)
  • They could have leased a similar home for $900 per month (increasing 3% per year)
  • Home Maintenance & Repairs for the family would be $2,160 the first year and represent 20% of each year's gross lease
When somebody decides to move to the Tallahassee real estate market, they have two options. They can buy a home in Tallahassee, or lease a home in Tallahassee. We can then analyze the difference between the two actions and determine how smart the decision that was made proved to be. When somebody buys a house in order to make it a home, it is more than an investment. It is a place to live, plus an investment. We can place a fair market value on what the house could be leased for (a place to live) and subtract that from the cost of home ownership (an investment) in order to determine the value of the investment. The table below shows all of the expenses (including landlord insurance) that would have occurred with this home during the period from 1991 through 2007. The table below combines all of the costs together under "Ownership" and compares them to the "Rent" that would have been charged on this home. The "Difference" can then be seen as part of the cost (if positive) or benefit (if negative) of home ownership versus leasing. As we can see below, a home in this price range would have been pure benefit.

Finally, to determine the investment benefit, we have to calculate the Internal Rate of Return on the home owner's investment and compare it with other investments the home owner could have made. The investment on the home would have been a five percent (5%) down payment (plus three percent in closing costs) which would have been $7,200. Had this money been invested in the stock market, in a fund matching the Dow Jones Industrial Average, it would have seen the following return:

Now we have a baseline for which to make a comparison. The initial investment (down payment plus closing costs = $7,200) could have been invested in the stock market for an after-tax internal rate of return for 10.2%. That is pretty strong. How will it compare with the Tallahassee real estate market?

Not even close! The median valued home in the Tallahassee real estate market would have yielded a comparable 37.5% internal rate of return over the same period. History keeps telling us to own our home.
As a reminder for those who subscribe to the Tallahassee Real Estate Blog by email, some embedded pictures and videos might not be appearing in your email and you might need to click the title header to go to your browser where all will be visible. Keep checking out the Tallahassee Real Estate Blog every day for updates that include charts, graphs, and analysis of the Tallahassee real estate market. If you like this Article then please subscribe to my blog through a full RSS feed. You will be able to stay informed about the happenings in the Tallahassee Real Estate Market. You can also subscribe to this blog and have it delivered by Email.   Joe Manausa is a real estate investor and the Broker and Co-Owner of Joe Manausa Real Estate. He can be reached via e-mail through the Tallahassee Real Estate Website or catch his latest writings on the Tallahassee Florida Real Estate Blog , or by calling (850) 386-2001. View Joe Manausa's profile on LinkedIn

Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.

6 Responses to "Rent Versus Ownership - A Tallahassee Real Estate Case Study"

Melbourne Florida Homes For Sale wrote: Wow that one graph says it all own your own home. I just find the amounts of insurance odd as our is three times that and I live in Florida also. After the 2004 Hurricanes the insurance cost went up like crazy and we have been dropped and had to go to another company. I also don't see HOA fees added in and they are pretty common. Under the insurance part again that just homeowners not even flood and windstorm. I'm just not sure about those stats. I do think home ownership offers you a long term investment.

Posted on Tuesday, February 19th, 2008 at 5:39pm.

Andrew wrote: This may be one of the silliest analysis of all time. The author uses a period where the entire nation (and certainly Tallahassee) has seen most significant appreciation in real estate prices in history. Of course benefits of buying will far exceed the benefits of renting during that period.

This is akin to say, "2000 was a great time to buy technology stock because during the past 5 years have gone through the roof!” Of course, anyone who follows the stock market knows that there was no worse period of time to invest in technology stock than in 2000.

To provide a far comparison of renting versus buying, one has to look at various scenarios where the general real estate market is: (1) stagnant, (2) appreciating, or (3) depreciating. Whithout looking at all three scenarios, a rent versus buy analysis is absolutely useless.

Furthermore, this analysis completely ignores risk. Risk analysis should be a critical part of any financial analysis. Right now, there are HUGE risks with buying real estate. First there is market value risk or the risk that the asset will be worth less tomorrow than it is today. Then, there are significant lifestyle risks. If you rent, and you lose your job, get sick, get relocated, or die, there is very little risk other than paying off the rest of your lease term. On the other hand, if one of those things happen while you own a house, the financial risk is huge. What about maintenance risk? If you get foundation or termite problems when you rent, you call your landlord and tell them to fix the problem. When you own, you lose your shirt. Lastly, in real estate there is neighborhood risk. What happens if your neighborhood starts getting taken over by gangs (did anyone notice the gang shooting earlier in the week?). If you rent, you move. If you own, you can attempt to sell but selling in a transitioning neighborhood is tough.

None of these risks are considered in the analysis.

Posted on Wednesday, February 20th, 2008 at 2:00pm.

Joe Manausa wrote: Andrew, I'm not sure I understand your comment about 2000. This analysis was over 2 entire real estate cycles. The ups and the downs. That was the whole point. The analysis started in 1991, not pre-boom. The numbers used in this are very real world.
Your points about the risks are right. Rent and you can always relocate every year. But I doubt most readers put value in losing $200K + of gain versus "neighborhood starts getting taken over by gangs..."

Posted on Thursday, February 21st, 2008 at 9:01pm.

Joe Manausa wrote: Rachel,

I'm glad you are happy renting. I think that is the wise choice for you, as it makes you happy. I am curious though, as a renter, are you concerned that rents are going to skyrocket to keep up with soaring property taxes and insurance premiums that the owners are now paying?

Posted on Monday, February 25th, 2008 at 5:51pm.

real estate postcards wrote: Very interested information you have here! Where/how did you happen to manage this data?

Thank You!

Anthony Brunetti

Posted on Tuesday, March 25th, 2008 at 5:38pm.

Joe Manausa wrote: Thank you Anthony. This is my own research from data that is available.

Posted on Wednesday, March 26th, 2008 at 9:26am.

Leave a Comment