Owning
v. Renting
Our
goals are simple -- to ensure that you're happy with the home you
buy and that you get the best deal you can. This describes why owning
should be less expensive than renting.
Our goals are simple -- to ensure that you're happy with the home
you buy, that you get the best deal you can, and that owning the
home helps you to accomplish your financial goals. Most people should
eventually buy homes, but not everyone and not at every point in
their lives. To decide whether now's the time for you to buy a house,
consider the advantages of buying and whether they apply to you.
Owning should be less expensive than renting
Here's a guideline that may change the way you view your seemingly
cheap monthly rent. In order for you to see how expensive a home
you could afford to buy while having the same approximate monthly
cost as your current rent, simply do the following calculation:
Take
your monthly rent, multiply by 200 = purchase price of home
Example:
$ 750 x 200 = $150,000
So,
in the preceding example, if you were paying rent of $750 per
month, you would pay approximately the same amount per month to
own a $150,000 home (factoring in tax savings). Now your monthly
rent doesn't sound quite so cheap compared to the cost of buying
a home, does it?
Even
more important than the cost today of buying versus renting, what
about the cost in the future? As a renter, your rent is fully exposed
to increases in the cost of living, also known as inflation. A reasonable
expectation for annual increases in your rent is 4 percent per year.
Renting and Inflation
Although
the cost of purchasing a home generally increases over the years,
once you purchase a particular home, the bulk of your housing costs
are not exposed to inflation -- if you use a fixed-rate mortgage
to finance the purchase. When you're in your 20s or 30s, you may
not now be thinking or caring about your golden years, but look
what will happen to your rent over the decades ahead with just modest
inflation! Then remember that paying $750 rent per month now is
the equivalent of buying a home for $150,000. Well, in 40 years
with 4 percent inflation per year, your $750 per month rent will
balloon to $3,600 per month. That's like buying a house for $720,000!
Although
the cost of purchasing a home generally increases over the years,
once you purchase a particular home, the bulk of your housing
costs are not exposed to inflation -- if you use a fixed-rate
mortgage to finance the purchase. Therefore, the comparatively
smaller property taxes, insurance, and maintenance expenses are
the only housing costs you will have that will increase over time
with inflation.
Even
if you must stretch a little to buy a home today, in the decades
ahead, you should be glad that you did. The financial danger with
renting long term is that all of your housing costs (rent) will
increase with inflation over time. We're not saying that everyone
should buy because of inflation, but we are suggesting that, if
you're not going to buy, you should be careful to plan your finances
accordingly.
Wealth and Equity
Over
the many years that you are likely to own it, your home should become
an important part of your financial net worth. This section covers
tapping into your home equity and how to better understand the value
of your investment.
Over the many years that you are likely to own it, your home should
become an important part of your financial net worth -- that is,
the difference between your assets (financial things of value that
you own such as bank accounts, retirement accounts, stocks, bonds,
mutual funds, and so on) and your liabilities (debts). Why? Because
homes generally increase in value over the decades while you're
paying down your loan (mortgage debt) used to buy the home.
Even
if you're one of those rare people who owns a home but doesn't
see much appreciation (increase in the home's value) over the
decades of your adult ownership, you will benefit from the monthly
forced savings that results from paying down the remaining balance
due on your mortgage. Retirees will tell you that one financial
joy of retirement is owning a home free and clear of a mortgage.
All
that home equity (which is the difference between the market value
of a home and the outstanding loan on the home) can help your personal
and financial situation in a number of ways. If, like most people,
you hope to someday retire, but (also like most people) saving doesn't
come easily, your home's equity can help supplement your other sources
of retirement income.
Tapping into equity
How
can you tap into your home's equity? •
Some people choose to trade down -- that is, to move to a less
costly home in retirement. Sell your home for $250,000, replace
it with one costing $150,000, and you've freed up $100,000. Subject
to certain requirements, you can sell your home and realize up
to $250,000 in tax-free profits if you're single; $500,000 if
married.
• Another way to tap your home's equity is through borrowing.
Your home's equity may be an easily tapped and low-cost source
of cash (the interest you pay is generally tax-deductible).
• Some retirees also consider what's called a reverse mortgage.
Under this arrangement, the lender sends you a monthly check you
can spend however you want. Meanwhile, a debt balance (that will
be paid off when the property is finally sold) is built up against
the property.
Balancing your investment
In your zest and enthusiasm to buy a place and make it your own,
be careful of two things.
•
Don't make the place too weird.You'll probably want or need to sell
your home someday, and the more outrageous you've made it, the fewer
the buyers it will appeal to -- and the lower the price it will
likely fetch. If you do make improvements, focus on those that add
value: for example, skylights, a deck addition for outdoor living
area, updated kitchens and bathrooms, and so on.
• Beware of running yourself into financial ruin. Changing,
improving, remodeling, or whatever you want to call it costs money.
We know many homebuyers who have neglected other important financial
goals (such as saving for retirement and gaining the tax benefits
of doing so) in order to endlessly renovate their homes. Others
have racked up significant debts that hang like financial weights
over their heads.
No More Landlords
A final (and not inconsequential) benefit of owning your
own home is that you don't have to subject yourself to the whims
of a landlord. When you own your home, the good news is that you're
generally in control. A final (and not inconsequential) benefit
of owning your own home is that you don't have to subject yourself
to the whims of a landlord. Much is made among real estate investors
of the challenges of finding good tenants. When you're a tenant,
perhaps you've already discovered that finding a good landlord isn't
easy, either. The
fundamental problem with some landlords is that they are slow
to fix problems and make improvements. The best (and smartest)
landlords realize that being responsive and keeping the building
ship-shape help attract and keep good tenants and maximize rents
and profits. But to some landlords maximizing profits means being
stingy with repairs and improvements.
When
you own your home, the good news is that you're generally in control
-- you can get your stopped-up toilet fixed or your walls painted
whenever and however you like. No more hassling with unresponsive,
obnoxious landlords. The bad news is that you're responsible for
paying for and ensuring completion of the work. Even if you hire
someone else to do it, you still must find competent contractors
and oversee their work, neither of which is an easy responsibility.
Another
risk of renting is that landlords may decide to sell the building
and put you out on the street. You should ask your prospective
landlords whether they have plans to sell. Some landlords won't
give you a truthful answer, but the question is worth asking,
if this issue is a concern to you. |
