EP 28 Rent or Buy?

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Welcome back to Money Matters where I help guide you in becoming a better and more confident investor. In this week’s episode I’m going to mix it up and instead of passing along my two sense on a financial topic, I’m going to answer a question from a fellow Rochesterian. Since starting this series back in January, I’ve been very pleased with the feedback and engagement from the community. While some people wanted to start a conversation, whether that’s in person or a phone call, others will send me emails with questions. Questions I’m more than happy to answer.

Here’s a questions from Julie:

Hi Michael,

My question is, we’ve been renting for a while now, and was wondering what your thoughts are on buying a home? Are we wasting money renting? Or should we start building equity?

Thank you for your help!

Julie.

Julie thanks you for the question!

And my long winded response is this. First off - People who come right out and say renting is literally giving your money away is always funny to me. They simply don’t understand the financial basics that make up this conversation. More importantly they may not understand your personal financial situation and goals. And more times than not they’re home owners – so they want to justify their purchase – making it easy to offer advice to people who rent. Now in some areas of the country it financially doesn’t even make sense to buy when you have zero savings. Places such as NYC, SF, or where I used to live Jackson, WY for example. The cost of a home is just way too much for what you’re getting not to mention the hidden cost associated with a home – Taxes, Maintenance, Insurance, your time (for what you value that) spent on fixing up the place.

When looking into purchasing a home, don’t go in with the simple equation of – ok my rent in $1,000 that means I can afford a $1,000 mortgage, right? Wrong! Those hidden cost I just spoke of account for 40%-50% on top of that cost, so hypothetically you should be budgeting for $1,400 - $1,500 a month when looking to go from a $1,000 a month rental. I know it sounds silly, but when making the biggest purchase of your life, make sure you’re doing your own due diligence for a year or more to have an idea of the area and size of your home you want. Make sure you have enough for the down payment. 20% is ideal for a 30 year fixed loan. Hitting that 20% mark makes it so you don’t need Private Mortgage Insurance, so you can save cost there. Make sure you’re staying in that home for at least 7 years – to break even after the interest/and closing costs. Any financial partnership who works with us, I like to get them to the NY Times rent vs buy calculator to at least give them some context on what they can realistically afford. I generally advise spending a year researching and becoming an expert. Whether that’s on Zillow or other real estate apps to get their fingers on the pulse of the local real estate market. Know if you’re in a buyer’s market or seller’s market.

At the end of the day, don’t look at your personal place of residence as a smart financial investment, because it often time may not be. I understand wanting to move to a home with a family to make memories and build a life, absolutely. That’s an investment in and of itself. From strictly a financial investment historically on average, your return on your home could be like buy a revolving CD latter as it’s an investment that will barely keep up with inflation year after year. Run the numbers from a purchased home, and then the sale price of that home 30 years afterwards and you’ll see.

Lastly I leave you with this thought. I’m 32 years old – Could I afford a house at the moment? Sure. But I don’t currently want to have to pay those hidden costs such as taxes. I want the weekends to come and go with me being able to do whatever I want and not be handcuffed to the routine maintenance that comes with owning a home. In time, I absolutely would like to own a home, but for the time being it’s a choice to continue to have what some call life equity in being able to travel, or spend my money on other things, or take my extra savings and max out my Roth IRA so I know I’ll be set as I head into my 40s, 50s, 60s, and onward…

At the end of the day, because everyone has individual goals and objectives, there is no “one size fits all answer to this question. The real question is figuring out what’s right for you and your family.

I hope this helps give you some food for thought, Julie. Thank you for your question and as always thank you for giving your finance the attention that they deserve.