Traditional Rental Costs Surpass Rent to Own Home Leases

Coast to coast, traditional rental costs are increasing at an alarming pace. If a standard lease renewal is on the horizon, renters can expect to see rents rise faster than the overall inflation rate. Some markets are seeing monthly rent payments rise by double-digit (10% +) percentage increases.

This is a serious concern for many traditional renters, but not so for those in a rent to own home. Housing and transportation expenses are usually the largest costs for a household budget. Living under a lease option in rent to own housing avoids unpleasant rent hikes.

How much more are traditional renters expecting to pay their landlord, for the privilege of just staying in their current rental? On average, it's a whopping $958 per year!

Consider 10 cities studied by the Wall Street Journal recently. The average rent paid across all these cities is $966 per month. Now, the range for the increase in annual rent payments varies from $697 in Raleigh, NC to $1,647 in San Jose, CA. In general, these increases add nearly the cost of an extra month's rent payment over the course of a year.

And no one expects rents to fall any time in the foreseeable future, so there is no relief in sight for folks living under traditional rental leases.

On a percentage basis, these increases range from 7.4% to 11.2% per month. Unless renters are expecting to receive big pay raises well above these levels, it is unlikely they will find themselves better off at the end of each month.

Here is a chart listing the cities and rent figures from the representational report:

Rents by Metro-area
(per The Wall Street Journal, March 25, 2011)

City and State

Average Rent per Month

% Increase vs 2010

1. Greenville, South Carolina
2. Chattanooga, Tennessee
3. Savannah, Georgia
4. Portland, Oregon
5. San Jose, California
6. Nashville, Tennessee
7. Tacoma, Washington
8. Denver, Colorado
9. Washington, D.C.
10. Raleigh, North Carolina

This paints a pretty poor picture for renters in the coming year. But, there is an alternative: buying a home!

The flip side of rental pricing is home prices. As of February, the median home price fell 5.2% to $156,100. That is the lowest median price in over 9 years, just before the crazy "housing bubble" began to inflate prices to ridiculous levels. And the median price is the point where 50% of homes are priced higher and 50% are priced lower, so there are plenty of homes to choose from at new, lower prices. Many of these homes make excellent choices for rent to own homes. Never before have houses for rent to own been more appealing for both buyers and sellers.

But what about dollars and cents? How does rent with an option to buy compare to old-fashioned renting? Here's an example.

Using the $156,000 median price as your target purchase price, let's see how attractive a rent to buy approach could be. Consider an agreed purchase price on the home is $156,000. In your lease option agreement, you contribute a 1.5% option fee, in this case = $2,340. Then, during the lease option, you agree to credit $500 of your monthly rental payments toward the purchase option. And your lease is 36 months long.

Let's add up the numbers now. The $500 credit times 36 payments = $18,000 in purchase funds. So the remaining purchase balance to finance is now $135,660 ($156,000 - $2,340 - $18,000). If the renter maintained or improved their credit during the 3-year long rental period, and secured a home loan in the future at a conservative 5.7% interest rate (fixed for 30-years), the house payments after purchase would be about $769/month.

$769 per month to OWN the home. That sure beats the idea of renting for the same amount, or even renting a similar place for up to twice as much! And, it is less than the current average rental cost in 8 of the 10 typical markets surveyed in the above chart. Plus, it's not too far off to be affordable in the remaining two markets.

Remember, we looked at the median price as our proposed purchase price. There are as many homes priced below this price as above, so there are undoubtedly many, many more homes to choose from that could produce even lower monthly purchase payments. Insurance and taxes would be extra, but there is room to add those figures and keep the home affordable, and allow today's renter to become tomorrow's buyer.