ownership

The Debate Continues: One User’s Opinion on Renting vs. Buying

As with anything, there are pros and cons that change with every complicated variable involved.  The concept of buying being better than renting is relative to the context of each side of the equation at any given time.  No two situations are the same, but generally speaking, assuming certain conditions are already met, owning a home is MUCH BETTER for long term wealth building than renting.

In an article that I wrote back in 2008 on the SonoranHouse.com blog, I illustrated the financial benefits of renting vs. buying.  Here’s what one user had to say, along with my thoughts on the response:

WRONG… Renting is FAR better and Cheaper than buying a house.

Not so fast.  There are too many variables involved, and each situation is different, but the principle cannot be disputed.  Owning is a long term prospect.  Not short term.  In order to conclude that owning is better, one must assume that the property will be held for as long as possible.

1. The down payment is $20,000 OUT OF YOUR POCKET on day one. SO by purchasing a house you are immediately $20,000 POORER the day you buy your house. In contrast, you can RENT and only pay a SMALL deposit equal to 1 months rent and keep the rest of your $19,000 to use as a safety net to pay the rent with and live an easy STRESS FREE life knowing you have the rent covered for 19 months if it’s a $1K a month rental.

When you pay a deposit to a landlord, it is a fee that can never be recovered.  When you put money down on a house, you are instantly investing your hard-earned cash in an appreciating asset.  You are not spending the money.  Again, if your investment mindset is short term and you sell your home too quickly, you will certainly cut into your initial down-payment unless your property experiences unheard of appreciation in a short time period.  Not likely to happen again.  Buying real estate is a long term wealth building investment.

A rule of thumb for an emergency fund is 3 to 6 months worth of living expenses.  If your rent is $1000.00/month, you have 19 months of rent paid for, but that doesn’t take into account the rest of your expenses.  If a down payment on a house depletes your living expenses, they you are not ready to buy.  Your down payment should be above and beyond your 3 to 6 months.  So, if your expenses are $2000/month, you should sock away about $12,000.  The rest can be used towards your future down payment.  This all assumes that you are completely out of debt.  If you aren’t, then you shouldn’t be buying a house in the first place.  Most renters do not have this much money saved up and they live paycheck to paycheck, so they feel they NEED to have some sort of financial buffer to buy them time.

The problem with this is that they never get OUT of the rat race by behaving this way, and they never put their money to work for them.  They will live the rest of their lives working for their money.  What would be the difference between having 19 months of STRESS FREE living in a home that is appreciating in value versus apartment living with the same amount of a safety net?  The difference is that part of your monthly payment is being added to the home’s equity.  Some of that payment will be recovered.  NONE of the rent will.

2. The Tax Deduction is nonsense… You spend $1.00 in Mortgage Interest to deduct .10 cents off your tax bill. HARDLY a “savings” at all. Your still LOOSING .90 CENTS in interest!! WAKE UP PEOPLE!!

Tax Deductions are a poor excuse for people who are poor to continue to be poor.  The argument here is that it makes sense to pay the bank $1.00 in interest to avoid paying the government ten cents.  Obviously that is flawed thinking.  Spending 90 cents to save 10 is absolutely ridiculous.  That is why the largest mortgage anyone should be financing is a 15-Year fixed.  Obviously paying cash is the best way to buy a house.

3. When you own a house you pay PROPERTY TAXES each and every year. These taxes are about 1.5% of the value of your home or around $3000 a year. That’s $3K a year your LOOSING if you own a house.

Hmmm…let’s see.  Property taxes at $3000/annually, deductible at your tax bracket rate, or $12,000 wasted on rent.  Personally, I’d rather put the remaining $9,000 in growth stock mutual funds to offset the perceived loss, because by the time my $9,000 per year is invested over 30 years, it will pay the property taxes a few thousand times over.

4. When you own a house you pay Property INSURANCE on your house each year. This will be about 1% of the value of the home so figure $2000 a year on a $200K house.

I own a $200K home.  Taxes and insurance annually do not exceed $3000.00.  In fact, they don’t exceed $2000.00.  This has everything to do with location and tax rates.  Again, I’d rather cough up $2000/year for insurance than blow $12,000/year on rent.  So based on points 3 and 4, which add up to $5000.00, I’m still ahead with $7,000 invested annually in growth stock mutual funds.  Come to think of it, my down payment of $19,000 as used in this example will be reimbursed fairly quickly.

5. When you own a house you pay for ALL MAINTENANCE/REPAIRS/REMODELS. This means spending about 1.5% of the value of your home EACH YEAR to keep it in livable condition so figure another $3000 a year on maintenance/upkeep.

Nobody forces remodeling, so we’re going to remove that from the equation.  Deferred maintenance is a price that everyone has to pay for, whether you own, or you rent.  As the king of your castle, you determine what’s used on your property to improve and maintain it and you have a choice over the cost/savings realized from it.  By renting, you have no control over these things, and the cost of rent is at the discretion of the landlord, who can easily raise it high enough to force you out to make room for someone else as a result of increased management costs.  Owning your own home offers greater long-term housing security.

6. In order to “get your money back” out of your house you will need to SELL your house. This means FINDING SOMEONE ELSE TO BUY IT. You’ll have to pay Closing Cost, Real Estate fees, etc. and it can take a LONG TIME to find a buyer. THEN even if you sell, you will have to live somewhere so you would have to turn around and buy ANOTHER house or do what most smart people do in the first place… RENT.

False.  As a long term investment, the asset appreciates and the value of the loan decreases over time.  If you paid cash, you have an instant money making machine creating passive income.  If you didn’t, you’ll eventually reach a point at which renting your home to someone else will generate positive income above what you owe on the mortgage payment.  The tone of point number six seems to emphasize the dependence upon cash in the bank to provide a safety net.  Obviously if you’ve been able to save $19,000, you’re making more than you’re spending, so the time that it takes to sell should be irrelevant unless you’re forced to move via relocation or other circumstance beyond your control.  It’s true that if you sell too early, you’ll erase your gains because you didn’t have a long term mentality.  There is so much more risk to buying a home when you borrow, but if you are able to pay cash for a home, then I’d say you’re living well financially.  One’s intelligence is not a factor determined by the decision to rent or buy.  One’s wealth, however, is.  If you want to get rich and live free like nobody else, then you’ll invest wisely.  Renting is not investing.

Owning a house ONLY makes sense IF you could pay CASH for it. Even then, your still going to “Throw money away” on Taxes, Insurance, Maintenance, and the excess bills that come from owning a house when if you RENTED many of those bills are included in the rent.

Paying cash for a home ISN’T THE ONLY time it makes sense to buy a home.  It is the BEST practice for sure, but you’re not throwing money away on taxes because your home is appreciating in value, and in theory, you’re renting that home out, collecting $1000.00/month rather than spending it.  Can you imagine how nice it would be to be able to put $12,000.00  less a few expenses every year without having to work for it?

The fact that there are additional bills when you own versus renting is also a false assumption.  Do the math over a long period of time.  Take the appreciation of real estate and the potential passive income from owning a rental and see where it would be in 30 years if invested wisely, long term.  Compare it to the real costs of owning.  Remember, we’re talking about ownership versus renting.  We’re not talking about owning a high cost property that has no potential to generate future income.  That would not be a wise investment.  Of course, you could just keep on throwing your hard-earned money away.  In fact…

…I’ll look forward to renting one of my properties to you because you sound like the perfect tenant.

ownership

The Benefits of Ownership

Buying a home doesn’t mean all of your problems will go away.  There are plenty of responsibilities that come with home ownership, but the benefits far outweigh those responsibilities.

Owning a home involves a down payment, property taxes, potential home owner’s association fees, and other various expenses that can seem at first to be a burden, but when put into perspective, are all positive aspects of home ownership.

• Down Payment – the downpayment becomes part of your home’s equity, or the amount of money your home is worth above and beyond what you’ll owe on it.  Equity is what you would walk away with if you sold the home.  Traditionally, since homes increase in value on average by 3% – 4% annually, your downpayment is now part of that investment.
• Property Taxes – Did you go to school?  Are you children in school?  Will they be?  Education is just part of what your property taxes pay for, and as I mentioned, contrary to popular belief, purchasing a home is not the most important investment you’ll ever make.
• HOA Fees – The homeowner’s association is responsible for keeping your neighborhood looking good for the purpose of retaining property values.  Nobody likes a run down neighborhood.  There are other benefits that you’ll learn about in their documentation (Covenants, Conditions, and Restrictions.)  Remember, not every neighborhood has one.

The fact that purchasing a home involves large dollar amounts is what typically drives the would-be buyer away.  But let’s face it.  Most of us don’t have $100,000 sitting around in our bank account, and so we remain stuck in a pattern of believing we cannot afford to buy a home.

So what makes buying a home such a financial benefit?

• Tax Deductions – When you finance a home, part of the payment you pay to the bank is interest and part of the payment is equity.  During the first 20 years of a 30 year fixed mortgage, the interest portion is actually disproportionately larger than the principle payment.  Under current tax regulations, you are permitted to deduct the interest payments from your income to lower your tax liability.  Renting does not allow this.
• Appreciation – Real estate, over time, will increase in value by an average of 3-4% annually.  In some cases more, in some cases less.  As your home’s value increases, your equity grows, which equates to you and your family walking down a road towards financial independence and complete freedom from the rat race.
• Equity – Part of your monthly payment goes towards chipping away at the balance of your loan and becomes equity in your home.  Equity is something you can recover when you sell the house, provided the value has increased.  When you rent, you don’t build any equity.
• Buying Power – As the equity in your home grows, so does your ability to borrow that equity to improve your home or invest in additional properties down the line.  While the reason we’re in this economic crisis is because of cash mongering greed, home equity loans are a potential solution to emergencies should they arise.
• Economic Stability – A 30-year fixed loan is just that, fixed.  The payment never changes.  Rent continually shifts from lease term to lease term and over time can increase.  Buying a home ensures your payments will always be the same.
• Freedom to Choose – Owning a home gives you the right to do just about whatever you want to it, from the landscaping to interior decorating, you’ll no longer be bound by the landlord’s rental agreement and you’ll have the freedom to express yourself exactly how you want.  Not only that, but you’ll also have the freedom to rent your home out to someone else.  Renting out your home is a great way to continue to reap all of the benefits above without having to pay for it.  In fact, your renter pays for it and helps move you toward financial freedom.

When you own, you have a voice, and you gain a sense of greater community, as though you matter more to the world.  I have owned my own home since I was 30.  I wish I had purchased sooner because I would be way ahead of the game.  Get on it today!  It’s time for you to buy a home.

ownership

So Who Can Buy A Home?

The media is drilling you with the same information day after day.  “Banks are failing.  Unemployment Rates are climbing.  It’s impossible to get a loan.”

The truth is, it’s not impossible to get a loan.  Why would they say this?  Because they continue to look in the rear view mirror at all of the high risk, no documentation, interest only loans they wrote over the past few years.  Guess what…those people are not the right people to be buying a home.

So who is it that can actually buy a house right now.

Well, obviously cash buyers can buy a house, but they are few and far between.  The next group of people are the only other group that really have a chance of buying a house right now.  That’s you and me.  The hard-working american who pays his bills on time, consistently, has a low debt to income ratio (and remember that lenders calculate debt to income ratios by including the potential loan that you’d be getting from them,) and has a good credit score.

If you fall into this category, and you’re renting, STOP THE MADNESS.  Buy a house.  Don’t worry so much about the fact that it may not be the perfect home.  Find something suitable that you might be able to turn into a rental down the road, and buy it, and live in it, and make it a home.

If, however, you’re low on income, have nothing to put down, have a low credit score, and don’t may your payments on time, then you can forget about home ownership.  Some people will always be renters.  If this is you, I would recommend learning as much about managing personal finances as you can from someone who knows before you consider even attempting to buy a house.

ownership

To The Owner, It’s More About the Home

There’s nothing worse than media articles that continually pound the idea that your finances are in shambles.  YOUR finances.  I’m not certain what the analysts in the stock market are attempting to convey during these strangely unique economic times other than:

1. You’re going to lose your job soon.
2. Your interest rates are going to increase.
3. You should not by a house.
4. The world as we know it is gone forever.

ENOUGH ALREADY!

An article posted today at Marketwatch.com states that…

The purchase of a house is the ultimate confidence indicator, and if there’s anyone out there with any confidence these days after what the markets and the financial sector have been through, then you’re talking about the true eternal optimist.

Are you that optimist?  Are you someone who wants to “indicate confidence?”  We in the real estate business know the value of home ownership.  We understand that when you buy a home, you put part of your payment into the value of the house, and part of it goes to the bank.  When you rent, which is what many people who are sitting on the fence are doing, all of your payment goes to the owner of the home, and none of it is invested.  Furthermore, none of your payment will help you reduce your tax liability at the end of the year.  And historically over time, your home will increase in value.

Are you interested in giving yourself a raise?  Then buy a house.

the housing market looks like a sunken soufflé

What a way to make a soufflé unappetizing.  But we’re not talking about food are we.  We’re talking about the concept of buying low and selling high, and the only thing that sunken represents to me is a low point, which is when I would buy.  What about falling prices?  When buyers hold out, sellers drop their price.  That’s just basic supply and demand.

But why, ultimately, are you thinking about buying a home?  Is it purely financial?  I would hope not.  This “sunken soufflé” could give you a perfect opportunity to finally secure a home.  Not a house, not an investment for quick profit, but a home.  Somewhere you can relax and entertain.  Somewhere you can raise your children over the next 10 years.  What you need is a place to call home.

If you look at the market in this light, it makes perfect sense to buy a home.  Real estate is and always has been a long term wealth building investment vehicle, but more than that, it’s your little piece of America that you can rest upon every night when you come home from a long day at work.