To Rent or to Buy?

To Rent or to Buy?

Owning a home is a lifestyle choice. It’s expensive (often a money drain) and time consuming.  If you are living there, it is NEVER an investment.  The housing market is not guaranteed to keep up with inflation, and you may even have to pay extra money to sell if the market tanks and your mortgage is underwater.  When does it make sense to buy instead of renting?

BUYING A HOME IS NEVER AN AREA WHERE RECKLESSNESS IS ALLOWED.  You must go in entirely as a businessperson.  Your home takes up far too much money and time and is far too big a commitment to not be made without careful consideration.

Does buying even make financial sense?  If not, rent!  I would recommend plugging in your own numbers in the NY Times Rent vs. Buy calculator.   It includes financial aspects that are often overlooked.

Don’t consider buying a home if:

  • You have ANY uncertainty in home ownership.
  • You are unable to save 20% for a down payment. If you don’t have an emergency fund, you should build that up first.  Unexpected expenses always pop up, and you have to take care of them yourself.  When something breaks, you can’t just call the landlord.  Instead of buying a house, focus on finding ways to save money and build a strong debt-free financial foundation.
  • You are unable to buy a home close to your work. Don’t own a home in exchange for long commutes that prevent you from spending time there.  Wait to buy, or find a new job.

Benefits of Renting

  • Control over your monthly budget – no replacing things that break down. Cost of renting can go up but the market dictates the rates and you can always move.
  • Flexibility of location – you can move anywhere you’d like! There is little risk that you would have to forego an opportunity due to your illiquid asset.  You can always sell your house, but there are heavy transaction costs.
  • Apartments/Condos offer more travel flexibility – an empty house can be an easy target for break-ins. The point is moot if you rent a house.

Benefits of Buying

  • You can mold the house exactly how you want it through renovations, or might even be lucky enough to find one that fits your needs perfectly without much work.
  • There is added diversification in your portfolio. I like to think of my house as my bond portfolio, and go 100% in stock index fund investing at my ripe old age of 26.  However, it’s still a real estate investment and there is still a risk of loss, as with all assets.

Benefits of financing (Full disclosure – I have no intention of paying my mortgage down early!)

  • Insurance and taxes usually go up, but your mortgage payment will stay the same. $600 now will purchase much more than $600 in 15 or 30 years due to inflation.
  • Low interest rates mean you can invest your money elsewhere, like in index funds.
  • Forced savings through the principal portion of a mortgage – equity is slowly building as I repay the loan.

Tips for shopping:

  • “Dream home” is an expensive illusion designed to make you spend more money than you would otherwise. Stick to a business mindset.
  • The one thing you can never change is the physical location of the house. Write out all the places you go each week, mark them on the map, and make sure that the house location is convenient. (Close to work and preferably within biking distance of everything you need.)  Do this BEFORE you start looking for houses.
  • Make a thoughtful list of everything your house needs to have that would be a deal breaker if missing, everything you want it to have that you’d spend money to modify if it was missing, and things that would be nice to have but are not required.  Think carefully.  Your needs may change between your first house and your second house.  Make sure any changes to the list are thoughtful as well, and aren’t just made on the fly “at your dream home.”
  • Spend a lot of time doing research!  I recommend at least four months. It’s not possible to spend too much time researching.  Your housing choice has a huge impact on your future.  At this point, you may find a house that meets your needs is far more expensive than renting.  (I spent 8 months researching St. Petersburg real estate before I moved down.)
  • Tour a bunch of houses, either with a realtor or through visiting open houses.
  • Layout is more important than square footage.  It doesn’t matter how much space you have if it isn’t usable.
  • Double check the efficiency of the furnace/heat pump, air conditioner, water heater, and the house’s insulation.  You’d be far better off buying a slightly dated but well insulated house with efficient appliances than a pretty updated house that will require a new furnace next year.
  • You generally want the “worst house in the best neighborhood” because that’s where the real opportunity is for improvement and value increase.  For example, if you can update a bathroom yourself for $1,000 in materials, you could save yourself thousands over buying a house that’s already updated.  Be mindful of anything you can update yourself later (and what you can’t).  Don’t be afraid of things that aren’t perfect.
  • Be extremely cautious not to acquire more house than you will actually need over the next few years. Taxes, insurance and maintenance will use up a large portion of money that you could have put elsewhere.  If your needs will be changing, you might be better off renting.

Tips for purchase:

  • Make an offer quickly when you find a house that meets all your criteria and is under-priced compared to the market
  • Have a full inspection done by a licensed home inspector
  • Get multiple quotes for insurance / know the risks of self-insuring if you are paying in cash
  • Get multiple rate quotes from banks if you are financing

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