Rent or buy? We’ll all likely face this decision at some point in our life. There are a ton of factors to consider, including interest rates, expected time period in the home, and your ability to finance it.
The advantage of home ownership is that you’ve secured your place on the roller-coaster ride of your local real estate market. If you plan on sticking in the area for some time, it’s comforting to get your seat on the ride. Whether the market goes up or down, you’ll always be able to sell and find another place in the area one day. The value of your property is going to be correlated to surrounding properties. If not, rents could rise in the area without your salary making a corresponding move, you could find yourself in a tough spot. Another scenario is that if you buy a home in City A but one day hope to move to City B, you’re at risk of City B property value appreciating at a higher rate than your own. As time passes, you may be saving towards one day affording that next home in City B, but in reality getting further and further from your goal.
The main advantage I see for homeowners is “forced savings” into an investment. Yes, your monthly mortgage and tax payment is greater than paying rent would be. But you’re paying for ownership of property, which is a great thing as long as the property is appreciating. Property has historically increased in value, or appreciated. However, areas do go through their own recessions and are subject to local legislative and economic risk.
If you’re currently renting, it takes a little more discipline. Figure out what it would cost each month to own the home you’re renting. Take the difference between that amount and what you pay in rent, and try to force yourself to set that aside each month. If you’re saving up for a down payment, leave in something stable, such as a money-market fund or short-term bonds. If you’re investing for the long-term, look at an index fund such as VO that will follow the S&P 500 closely. Because although it takes more cash to own and maintain a home than it does to rent, that homeowner is “in the game” and benefits from land value appreciation in the area.
Looking to own a second home and perhaps be a landlord? There are a ton of factors to consider that may make you second guess this. It can certainly be lucrative from an investment perspective if you find a market that is about to pop. However, taxes, closing costs, maintenance expenses, etc. all cut into your bottom line. It also may be prudent to diversify from a geographical perspective. If you already own a home in Denver, is it really wise to put all of your eggs in one basket and buy another home in Denver? It’s definitely a riskier play than having one home in Denver and another in Los Angeles. Contact me for a free spreadsheet that can help you work through what you can afford, financing options, and everything to consider when looking at purchasing a rental property. There are many successful real estate investors, but equally as many that go belly-up thanks to being unprepared for what they’re getting into.
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