When does owning in Miami become a better deal than renting?

Renting Versus Owning Real Estate in Miami – What is the Breaking Point?

Many new Miami residents ask us whether it is better to buy or to rent in Miami. As a general rule of thumb most people would argue that buying is always better than renting. You are building up capital and you don’t pay someone else’s mortgage. We decided to go deeper into the topic and to explain the financial difference between buying and renting in Miami.

Zillow’s Breakeven Horizon Report

According to Zillow buying a home in Miami is a great deal – so long as the owner stays in it for more than two years.

In Zillow’s latest Breakeven Horizon report, which calculates how long the average homeowner has to stay in a home before it makes more financial sense than renting, the nationwide breakeven horizon in 2016 was 1 year and 11 months. According to the report, that is a 20-day increase from 2015, and the result of a widespread slowdown in home price appreciation.

Buying in Miami, however, a person needs to own his or her home for two years and a little over two months before it makes more financial sense than renting (assuming the home appreciates 1.73 percent in the first year). While that’s a relatively high breakeven horizon for Florida, it remains well below many other major metropolitan markets. The areas with the longest Breakeven Horizons tend to be concentrated in expensive markets along both coasts, driven by a slowdown in home value growth over the past year and by continued slowdowns to come. A slowdown in these pricey, fast-moving markets such as Miami means it may take longer going forward to break even financially when buying a home in those areas compared to renting it.

Factors in Zillow’s research include expected growth in rents and home values, price-to-rent ratios and mortgage interest rates, which can all have a significant impact on the costs and benefits of renting versus buying.

Because home values are growing more slowly, it will naturally take longer to earn enough equity in a home to offset the very large upfront costs necessary to purchase a home in a pricey market.

Breakeven Calculations for Miami Homes

We made a calculation for you based on a home of respectively $500,000, $1M and $1,5M. For each property we assumed that you make a 20% down payment and finance 80%. The interest rates for the mortgage are set on the current 4% and we calculated this based on someone with a 700 – 720 Credit Core.

We then calculated the yearly costs of owning this property in the first year (slightly more expensive because of the closing costs) and following years. Based on this you can see what the monthly costs are of owning a property and determine the threshold as to where it becomes more cost effective to rent versus to own.

This is a rough guide for a $500,000 house with a 20% downpayment and a $400,000 mortgage.

*The tax value is 2% of the appraised value. The appraised value is approximately 80% of the sales price. In this case 2% of $400,000 is $8,000
** Maintenance / Upkeep. With this we understand the upkeep of the property such as new floors, fresh paint, new airco system. This is estimated at $1,500 per year for a $500,000 property.
*** The insurance can vary widely depending on the status of your house. We estimate $2,500 per year for a $500,000 home. If your house is built according to the latest standards the insurance costs will go down, while older homes that are not hurricane proof will have higher amounts of insurance.

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This is a rough guide for a $1,000,000 house with a 20% downpayment and a $800,000 mortgage.

*The tax value is 2% of the appraised value. The appraised value is approximately 80% of the sales price. In this case 2% of $800,000 is $16,000
** Maintenance / Upkeep. With this we understand the upkeep of the property such as new floors, fresh paint, new airco system. This is estimated at $3,000 per year for a $1M property.
*** The insurance can vary widely depending on the status of your house. We estimate $5,000 per year for a $1M home. If your house is built according to the latest standards the insurance costs will go down, while older homes that are not hurricane proof will have higher amounts of insurance.

Click on image to enlarge

This is a rough guide for a $1,5M house with a 20% downpayment and a $1,2M mortgage.

*The tax value is 2% of the appraised value. The appraised value is approximately 80% of the sales price. In this case 2% of $1,2M is $24,000
** Maintenance / Upkeep. With this we understand the upkeep of the property such as new floors, fresh paint, new airco system. This is estimated at $4,500 per year for a $1,5M property.
*** The insurance can vary widely depending on the status of your house. We estimate $7,500 per year for a $1,5M home. If your house is built according to the latest standards the insurance costs will go down, while older homes that are not hurricane proof will have higher amounts of insurance.

Click on image to enlarge