It’s a very common dilemma for the young professional. Should you buy or should you continue renting? There are so many factors to consider when asking yourself this question. What is right for one person is not necessarily going to be right for the next person. My goal is to break down the facts in a clear and easy to understand format so you can make the best decision for yourself.
Tune Out Other People
My first recommendation is going to be tune out other people. Don’t get me wrong, your inner circle means well but they are not you. They have different lives, different goals, different dreams, hopefully you get the idea. What worked for them may or may not work for you. Quick disclaimer: Talk to and listen to your wealth advisor, your tax planner, your financial planner, your attorney, just think twice about that advice your old crazy uncle Ernie gives you or what your brother did 7 years ago that is so repeatable. Trust me on this one.
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Long Term or Short Term
My second recommendations is to clearly identify as best you can your time frame to own your house. This might surprise you coming from a guy who makes a living selling real estate but I would think twice about buying a home if you are in it for the short term. Even with the best of plans, a lot can change in a short amount of time. For example, if I asked you in late 2019 what your 2020 would look like, what would you have said? See my point? The real estate market cycles. Home values appreciate and they appreciate. Sometimes they rise quickly in a market boom. Sometimes home values fall fast in a real estate market crash. You don’t want to be caught in a faulty planning scenario were you buy high and find your self having to sell low. Sometimes you don’t have a choice and live makes that decision for you so why stack the odds against yourself.
Home Maintenance
My third recommendation is to make an honest assessment of your life and determine if owning a home actually matches your lifestyle. Are you ready to tackle the maintenance required in owning a home? The is no maintenance person to call. If something goes wrong, it’s on you to fix it. All upkeep and repairs are 100% your responsibility.
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How’s your job situation looking?
Being a home owner is not cheap. Are you living paycheck to paycheck? Still paying down student debt? Paying off credit cards? Working for a startup that’s hanging on by the skin of their teeth. If you are employed today but could be unemployed tomorrow, you might want to consider putting home ownership on the back burner. At least until your job situation becomes a little more stable.
Don’t forget flexibility as well.
Being a renter makes it generally very easy to pack up and move to the next opportunity. Finish out the lease or break it (landlord permitting) and it’s on to the next. When you own your home, you have a lot more to consider. Such as renting it out, hiring property management, possibly putting it on the market. Very different than being a renter.
Rent versus Buy Calculator
My fourth recommendation is check out one of the thousands of online rent versus own calculator on the internet. There will be a break even or shift to positive territory no matter were you are thinking of renting or buying. Some markets can be close but some can be drastically different.
For example, in my market in San Diego, the cost to rent a luxury 1 bedroom apartment in the city might run you around $2800 a month. The cost to purchase a similar condo in the same area would end up costing around $2700 a month. I am assuming a lot of things here but I just want to illustrate the point. On paper, renting appears to be the better option. Especially when you consider taxes, HOA dues, maintenance costs etc. But after about year 3 or 4, the costs start to favor buying instead of renting. The costs continue to shift each year after heavily favoring buying instead of renting. Something to consider in your target city or neighborhood.
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Just remember this, your costs associated with renting are simple: Just your rent in most cases.
Costs to account for in owning are usually going to include some sort of considerable down payment on year one, yearly property taxes, potential monthly home owners association dues, closing costs, insurance costs, and other fees. The list might seem long compared to renting but I assure you, after a couple years it starts to look like peanuts compared to the amount a landlord might raise the rent to.
Landlords Raise the Rent
Landlords can raise the rent and they can raise the rent frequently. Some markets have forms of rent control but that only helps so much. When you own your home, your payment never goes up. Unless you agree to some type of funky loan, not recommended. Your payment starts to look real small as the years go by. Time favors the homeowner is almost every scenario.
To wrap this up, I want to present some reasons to buy and some reasons to rent. Renting is a better situation for some. Buying will be better for others.
My case for buying.
Buying a home is the most common path to building equity — As a homeowner, every time you pay down principal on your mortgage you are purchasing a greater percentage of your home. It’s almost like a forced savings. This is a significant benefit compared to renting, for which you receive no long-term value.
Home ownership tax incentives a real. Homeowners can deduct mortgage interest on a new loan of up to $750,000, which was decreased from $1,000,000 recently. Likewise, they receive a deduction for property, state, and local taxes up to $10,000.
You can’t skip the fact you own your place. Tired of answering to your landlord? You call the shots, you make the rules. Its yours to do as you please. HOA permitting in some cases.
There is usually stability in the costs. Once you lock in a mortgage rate, your annual costs is reasonably constant. Renting costs can shift substantially higher over time. Remember my comments on your landlord?
My case for renting.
You absolutely have fewer upfront costs, You pay rent and that’s generally all you pay.
This frees up capital to invest elsewhere. This could allot for a more diversified portfolio.
You have great flexibility. Renters benefit from shorter commitments and the ability to move around.
No maintenance. This is a big one. Saves you money and time.
Some believe the housing market is overpriced. Real estate prices have steadily increased for the last 12 years and counting. You will pay more for your home. Some believe the market will come back down, others do not.
There was a time in the not so distant past that owning your own home was the benchmark for financial success. While pride of ownership is still a thing, it doesn’t make sense for everyone.
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