If you’ve rented a house in Metro Phoenix in the last few years, it’s likely that you:
- Had a major life event (divorce, job loss, illness, death of a loved one)
- Are new to town
- Aren’t ready to commit to the joys (& pains) of homeownership
- Were between homes or waiting out a renovation
- Had a short sale, deed in lieu of foreclosure, foreclosure, bankruptcy, etc.
What you likely learned in this process is:
- Landlords hold the reigns- raising rents, maintaining the property condition
- Rentals in good condition aren’t cheap & go fast
- Desirable locations (near good school districts, jobs, amenities) attract lots of renters
This is a quick snapshot of what our rental situation looked like in the last 30 days (from today, 6/14/16):
Of 1,178 leased single-family homes in the last 30 days, the median lease price was $1390 (Buckeye, if you’re curious) and the averages were:
- Asking price- $1600; the average leased price was $1593 (not much negotiation room)
- House sized- 1,977SF
- Days on the market before leasing- 21 days
Here’s some info that will paint a clear picture of what’s going on with rentals:
What the above figures mean:
- 1- Monthly Average Lease Price per Square Foot- From a low point in 2010, rents have been trending up, particularly over the last 2 years.
- 2- Leased Rentals in 30 Days- Lease Price per Square Foot- Rents in the most central areas of the valley, tend to be the highest, but it’s also where property values tend to be high.
- 3- Average Lease Price by Zip Code – 30 Day Average- Rents in Paradise Valley, Arcadia, Old Town Scottsdale, Biltmore/Camelback Corridor, Downtown/Midtown/Historic Districts of Phoenix, Desert Ridge & McCormick Ranch/Scottsdale Ranch are the most expensive areas in the valley to rent
The least expensive of the top 10 most expensive zip codes (85258- McCormick & Scottsdale Ranch) had an average lease $/SF of $1.09/SF. The average rental house of 1,977SF rents for an average of roughly $2,154. (FYI- in the last 30 days only 8 houses leased via ARMLS in 85258 & that average house size was 2,591SF)
$1.09 ($/SF of house in 85258) X 1,977SF (avg house) = $2,154/mo spent on rent
According to HUD the median income for Maricopa County, AZ for FY2016 is $62,900. The average Maricopa County renter, renting the average-sized home in the least expensive of the top 10 most expensive zip codes in the area would pay a whopping 41% of their monthly income on just housing alone!!
$62,900 / 12 (mos)= Avg monthly income of $5,242
$2154 (avg rent) / $5,242 (Avg monthly income) = 41% of income spent on housing alone
What’s a renter to do??!
For starters, think about what you need in a rental home, then figure out what homes in this area are leasing for (not the asking prices). I can help you with this to some extent. If the area where you want to rent a home is a premium rent area, do the math.
- Calculate your monthly income (and include the income of any adult sharing the cost with you)
- Add up the minimum payment of your monthly expenses (car, credit cards, student loans, etc.) and total all these costs.
- Add your minimum monthly expense + cost of the proposed rent = total monthly expense.
- Divide: Min monthly expenses / monthly expense = debt to income ratio (DTI)
- If your DTI = <35% think twice about whether renting, or renting in this area is right for you…
What else do you need to know?
Your landlord will likely want:
- a recent paystub or something documenting your current income
- a copy of your drivers license
- an application documenting where you live now and other details
- a credit report and/or background check
If you’ve been unfortunate to experienced a financial hardship in the last 7 years, your potential landlord may as you for a myriad of other items like:
- your most recent W2
- A tax return
- a copy of a bank statement or statement
- a co-signer (friend, spouse, etc.)
- a higher security deposit
- prepaid rent
If this wasn’t justification for getting a roommate or getting married, I don’t know what is… Oh, actually, I do. Instead of renting, BUY A HOME…
It just so happens that about 2 weeks ago, I had a client in exactly that same scenario… She had been renting in one of the 10 most expensive zip codes (#10- 85258 (McCormick Ranch- Scottsdale). She was paying $2,095/mo and had been for over 2 years. She lucked into the opportunity to buy a home slightly under market value at $430K. With her 5% down payment of $21,500, she got a loan of $408,500 with about 4% interest and monthly payment of $2478/mo.
“WHAT?!! That’s not lower…” you might be screaming at me in your head. I know it’s not. The mortgage insurance of about $213/mo she’ll pay for not having 20% for a down payment will penalize her a little bit. There are also other ways if you don’t have 20% to put down to avoid paying mortgage insurance- I can tell you about those if you’re curious. Without the mortgage insurance or (PMI), her payment would be $2,265/mo. Remember, rents have been rising, so her $2,095/mo payment likely would be more than $2,095/mo.
What you need to know is that after 5 years of making all her payments on time, she’ll only owe $372,328.89. At that point, her $430,000 house would have what we call, “equity”, of $57,671.11. Additionally, each year at tax time she can deduct the mortgage interest that she pays on her home (~$14-15K per calendar year) if she itemizes her taxes. This is where the benefits start to add up.
If she improves her home (she plans on doing a kitchen renovation in the near future), when her house reaches 20% equity, her PMI payment drops off when her lender verifies the appreciation with an appraisal. Some borrowers can also refinance their mortgage if the another loan is more advantageous to them (i.e. better interest rate or program terms).
But, we still haven’t looked at any appreciation yet. “Appreciation” is the house increasing in value along with the area around it. If we assume her home appreciates at 1.5% per yr during the next 5 years (the avg annual appreciation for 85258 as of 6/1/16 is 2%), her $430,000 house will be worth $456,386. Now, that equity we talked about earlier before appreciation goes from just under $58K to $84,057.47!
If you know anything about savings, 1.5% compounded appreciation is probably better than your bank is doing with your savings account AND you’re paying down what you owe, not putting money away, per se. That’s not a bad savings plan… especially if you stay there 30 years (it could happen) and then you have an “asset” (fancy for “owned free and clear”).
Think my insight is lunacy?! The AZ Republic published an article on 5/14/16 that I didn’t know existed until after I wrote this post: http://www.azcentral.com/story/money/real-estate/catherine-reagor/2016/05/14/rising-rents-spurring-more-metro-phoenix-homebuyers/84239306/
Yes- the down payment is always the golden ticket into the circle of home ownership. I’ve heard non-real estate industry friends talking about “begging, borrowing & stealing” to get the money for that down payment and closing costs. I personally prefer, diligent saving and maybe a family gift, but if you can hack it for about 5 years, the long term benefits are usually well worth the added cost. We used a high rent area for this example, but imagine what the numbers would look like for a house in a mid range area… do you get where I’m going with this??
Oh and if you still want to lease a home, check out my new lease listing in McCormick Ranch (pictured above) at 8507 E Welsh Trail. It’s a beauty! 😉