Your Next Home: Should You Rent or Buy?
by John Schneider
When David and I were approaching our goal of becoming debt-free and contemplating buying a home, we did a thorough analysis and had lengthy discussions about the pros and cons of renting versus buying. Here’s how we approached our big decision.
Consider Your Location
The number one reason for renting over buying is that you’re not sure where you’ll be in five years. The only reason that I moved to Colorado was to snowboard. My original plan was to get my snowboarding fix within two to three years and then move back home, closer to where my family still lives today. At that time, buying made no sense. There would be no way for me to recover my costs from buying and selling a home with-in two to three years.
Why the five-year benchmark? It’s a reasonable amount of time to recoup costs from a home purchase and have an increase in your home’s value.
If you’ve recently graduated, are job hunting, and don’t want to limit your options for finding a job, not being tied down to a house offers excellent flexibility. That keeps the geographical location for your job search wide.
If you travel a lot or have a relationship with someone in another part of the world, you may not want to be tied to a house. What if you go on vacation somewhere and discover you’d like to make it your home base? What if you want to move to where your partner is? In these cases, having a house may be a burden.
Rent Until You Can Buy
One major contributor to the 2008 housing crisis was that people purchased homes they really couldn’t afford. They were either taken advantage of by an aggressive bank or real estate agent or they dismissed traditional reasoning when it came to buying their home.
We still believe in not purchasing a home more than three times our annual income — combined income if you’re partnered and individual if you’re single. This logic ensures a homeowner won’t become house-poor, allowing for a better quality of life and reduced stressors. We also believe that buyers should put 20 percent cash down on their home purchase. This often affords the homebuyer a better interest rate that could save tens of thousands of dollars over the life of their home loan.
Putting 20 percent down also lets buyers avoid Private Mortgage Insurance (PMI). PMI is the insurance cost homeowners pay if they’re unexpectedly incapable of paying their mortgage. In other words, PMI protects banks from risky loans.
When we were shopping for a home, our real estate agent told us that we could afford three times the amount we determined affordable for us. After having just become debt-free, we knew we didn’t want to be house-poor. We found a home within our budget, and our quality of life has been all the better because of this. We have no stress about paying off our home — we’ll pay it off eight years early, in fact. And, because we’re not house-poor, we’ve traveled extensively. Sure, our home is a third of the size of most of our peers, but a large home was never something we wanted.
Finding an affordable rental unit is an excellent method for saving for the home of your dreams in no time.
When we share this advice, people often complain that it’s going to take longer than they want to buy a home. It is true that this method requires an investment of your time, but the time you spend saving can be used to research and determine the type of home you want to buy in the location you’d like to live.
Know the Housing Market
As with any investment, we never expect to buy at the absolute lowest price, and there’s no guarantee we’ll sell at the absolute highest price. Either of these is about as common as winning the lottery. However, don’t completely ignore the tea leaves.
If you know where you’ll be in five years and decide you want to buy a home there, learn about the current local market and the national market. What’s reported in the media at the national level may not represent the housing market at the local level.
For example, the real estate market in Denver is hot. Homes are staying on the market for only a few days. However, because of local laws, there’s a glut of apartments that are set to condo within the next five years. If Denver’s housing market doesn’t soften for other reasons, there’s a chance it will in about three to five years because of this pending surplus of condos.
The variables in each location are unique. Do some research online and talk with friends and family to see what they know. Visit with a couple of real estate agents to get a professional understanding of the local market.
The national market can have an influence on the local markets. When the Fed changes rates in Washington, the impact of that decision ripples throughout the country. National trends may eventually become local trends, so it’s always a good idea to keep an eye on the housing market at a national level.
This is a lot of work, but it’s worth it because a home purchase is such a large investment. It may be the single most substantial investment a Grownup ever makes.
Rent to Own
Some markets have a large inventory of homes, creating more sellers than buyers. Consequently many homeowners, especially landlords looking to unload properties, find it hard to sell their properties. You could be their solution.
Rent to own means the buyer essentially leases the property they wish to buy from a selling landlord and has the right to purchase the property within a period of time (usually within one to three years) at a fixed price. Agreements are unique from case to case, but frequently the buyer in this deal pays the standard rental fee plus a premium, all of which fund the purchase.
This type of agreement can be mutually beneficial because both parties eventually get what they want. Rent to own arrangements take longer, but for a buyer who doesn’t currently have the advised 20 percent down, it’s a good alternative to a mortgage.
Many people think that owning a home is the holy grail of real estate, but that’s not true for everyone. Consider your unique situation and decide what’s right for you.
Read more stories from John Schneider at DebtFreeGuys.com.
This story was first published on the Society of Grownups blog.