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A Complete Rent vs Buy Discussion

3/9/16 1:12 PM / by Antonio Lopez

Antonio Lopez

Deciding to purchase your first home is major decision (obviously). The question your asking is, should I buy a house or keep renting?  And the answer you receive will depend on who you ask.  

Ask a real estate broker, a mortgage broker or a financial guru, they will say, Yes, absolutely buy a house to start building equity & stop paying someone else’s mortgage with your monthly payment.  

But ask your bank account, your sense of freedom, or your roommate.  You may get a different answer.


 

 


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Should I Rent or Should I Buy a House?

The truth is there are many factors contributing, many are financial, but some are personal.  Below we discuss the financial and emotional implications of the decision

Financial Considerations

From a simple, analytical point of view you need to consider all the financial implications of buying versus renting.  These include the initial costs, recurring costs, and net proceeds of both buying and renting.  Then, you’ll compare the two & make your decision.

Use the comparison calculator here to run some numbers.

Initial Costs

Buying: The cost incurred when you close on your property, including down payment, closing costs, and other fees.

Renting: The cost incurred for security deposit and move in fees. 

Recurring Costs 

Buying:  Monthly and yearly costs associated with owning a home.  This includes the mortgage payment, interest, homeowners insurance, and property taxes.  These are the expenses most people consider.  What is often overlooked are the costs of property maintenance & repairs, both major and minor.

Renting: This includes rent payment and renter’s insurance.

Net Proceeds

Buying: This is the amount of money you’ll get when you sell your home, minus the initial and recurring costs totaled together.

Renting: This includes the return of your security deposit. 

Personal Considerations

Maybe you’ve calculated that it may make more financial sense for you to keep renting, but you have personal and/or emotional reasons for wanting to buy a home.  These include wanting to have a personal yard for a pet or your love of gardening. Perhaps it’s the desire to design and renovate a one of a kind home, just for you.  Or perhaps it’s simply the life long dream of homeownership and pride that comes with it.  If these considerations are worth it to you, go forth, you only live once.

 

Buying a House Is for Suckers

Grant Cardone on Entreprenuer.com:

Unless you have 20 million bucks in the bank, in cash, you have no business buying a house.

People think the only way to save money is to buy a house. Suzy Orman thinks you have no way to earn any real money for yourself, so she advises you to buy a house as the only way to get your money. You will get your home paid off when you are old. Who wants to wait until they are old to have money?

A home is not an investment because it doesn’t pay you every month.  In fact, you have to pay it every month. That’s why a house is not an asset, it’s a liability. Nothing is a good deal if you have to feed it constantly.

People ask, “Why would you pay rent when you could buy?” Because you can’t leave. Who wants to go to jail for 30 years? You can be mobile and nimble if you rent. Mobility is a great thing in today’s world. Why settle down? Invest the money in yourself or your business. Your money needs to be free!

1. Invest In yourself.

I do a weekly talk show called Young Hustlers where I talk to millennials about all things money, career and sales. I always emphasize the need to invest in yourself, no matter what your age. When I was 25 I made a $3,000 investment to buy a sales program for the purpose of becoming better at my job. Becoming a better you will never fail you.

2. Focus on Income.

Whether you have a house or not is irrelevant to how well you are or, will be, financially. So many people are concentrated on savings but their real problem is they just don’t make enough money. I encourage the millennials on my Young Hustlers show to spend their energy on this one thing -- getting their incomes up high enough where they can actually make a real investment.

3. Invest in something that pays you.

Only after you have enough income can you start to think about investing. As I mentioned earlier, buying a home to live in is not going to pay you. Whether it be multi-family real estate or something else, a true investment will not cost you money. There are so many real estate agents out there giving false information. A home needs to be fed, it won’t feed you.

If you start investing in yourself, focus on growing your income. Put that growing income into an investment that will pay you, then you will be living like the rich do, not like the middle class.

 

Reconsider Buying a House IF....

If you’ve determined that buying makes more sense financially, do a quick reality check. We may be one of the only real estate teams out there providing the following list.  Here are the reasons you should rent instead of buy:

 

No Down Payment

Having a downpayment is beneficial because you start off with equity in the home. It also decreases your monthly payment while making your offer on a home more appealing to a seller. If you don't have all of the funds necessary for a downpayment, there are other options to consider. There are loan programs that will assist with the downpayment necessary to complete the transaction. Ask your Real Estate Broker and Loan Officer for more information for these programs, if needed.

 

Uncertain Location

Do you know for sure that you want to stay put for the next 5 years? Are you secure in your job?  If you want to move to another city in the next 5 years (and prefer not to be an out of the area landlord), you should probably hold off on buying.  In a similar vein, how secure is your job?  If you decide to quit or are forced to leave via lay off or being fired, are you confident you will be able to secure another job in this area?  Would this limit your job search?  Depending on where you are in your career and your industry, it may be wiser to keep location options flexible.

Lifestyle

Honestly, most people can afford to rent a much higher lifestyle than they can afford to buy. Think about it, if you rent a place in Seattle for $3200/month, that’s a very nice place in a convenient location. That same payment will buy you a place for ~$450,000, which at the time of this writing will get you a decent townhouse or condo, much smaller and in a less desirable location.  

 

Do You Know the Cost of NOT OWNING? 

Owning a home has great financial benefits, yet many continue renting.  

Today, let’s look at the financial reasons why owning a home of your own MAY be the best option for you and your family.

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The answer is quite simple.  How much are you currently paying in rent? The image is somewhat misleading, you aren't completely flushing your money away... You are paying to live somewhere independently (versus at with your parents) and that place is likely relatively comfortable (compared to your car or a tent). 

But the fact remains, you have nothing to show for your money, very likely your highest expense each month.  When people ask me how to get started investing in real estate, the first item we review is the plausibility of trading their rent payment for a mortgage payment.   If you could trade your rent payments for a mortgage payment, would you?  

Zillow recently reported that:

“With Rents continuing to climb and interest rates staying low, many renters find themselves gazing over the homeownership fence and wondering if the grass really is greener. Leaving aside, for the moment, the difficulties of saving for a down payment, let’s focus on the monthly expenses of owning a home: it turns out that renters currently paying the median rent in many markets could afford to buy a high-quality property without increasing their monthly expenses.”

Owning is usually financially smarter than renting:
  • Mortgage payments are generally fixed while rents go up (every year).
  • Equity in your home can be a financial resource later.
  • You can build a rental portfolio without paying capital gains.
  • Homeowners can enjoy greater wealth growth than renters.

Every renter must realize that all the expenses the landlord incurs are already baked into the rent payment along with a profit margin!!

Owning a home has always been, and will always be, better from a financial standpoint than renting.

I take this a step further, what if you could reduce your monthly payments, by say, 50%??

There are creative strategies available for nearly every situation, especially for those willing and able to learn, roll up their sleeves and get to work! 


Top 4 Reasons to Buy a House

 

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1. Buying is Cheaper Than Renting

The results of the latest Rent vs. Buy Report from Trulia show that homeownership remains cheaper than renting with a traditional 30-year fixed rate mortgage in the 100 largest metro areas in the United States. The report reveals that:

“Interest rates have remained low, and even though home prices have appreciated around the country, they haven’t greatly outpaced rental appreciation…Nationally, rates would have to reach 9.1% for renting to be cheaper than buying. Rates haven’t been that high since January of 1995, according to Freddie Mac.”

2. Homeownership “Forces” You to Save

According to SavingAdvice.com, homeownership is a great way to save. Their advice is quite simple:

“Homeownership is a “forced” savings account because you own the home, you have no choice – that monthly housing cost has got to be paid no matter what…Homeownership can be an outstanding way to force yourself to be more frugal in the rest of your spending so that you can save and build equity in your home.”

3. Homeownership Offers Several Tax Deductions

According to the Tax Policy Center’s Briefing Book -“A citizen's guide to the fascinating (though often complex) elements of the federal Tax System” - there are several tax advantages to homeownership. Here are three:

  1. Homeowners who itemize deductions may reduce their taxable income by deducting any interest paid on a home mortgage.
  2. Homeowners who itemize deductions may also reduce their taxable income by deducting property taxes they pay on their homes.
  3. Taxpayers who sell assets must generally pay capital gains tax on any profits made on the sale.
4. Experts Expect Home Price Appreciation to Continue

Every quarter, Pulsenomics surveys a nationwide panel of over one hundred economists, real estate experts, and investment & market strategists about where they believe prices are headed over the next five years. They then average the projections of all 100+ experts into a single number.

Over the next five years, home prices are expected to appreciate 3.22% per year on average

and to grow by 17.3% cumulatively, according to Pulsenomics’ most recent Home Price Expectation Survey.

 

69% of Buyers are Wrong About Down Payment Needs

According to a recent survey conducted by Genworth Financial Inc. at the Annual Mortgage Bankers’ Association Secondary Market Conference, 69% of mortgage professionals say that first-time buyers still believe a 20% down payment is necessary to buy in today’s market.

Nearly 40% of mortgage industry professionals surveyed believe that a lack of knowledge about the home-buying process is keeping potential buyers on the sidelines. Saving for a down payment is often cited as a huge barrier for first-time homebuyers to make the leap into homeownership.

 

If homeowners believe that they need a 20% down payment to enter the market, they also believe that they will have to wait years (in some markets) to come up with the necessary funds to buy their dream homes.

 

The greatest source of confusion cited in the survey results centered around down payments. In 2017,  Fresh Look  served 54 families with less than 20% down payment available.

 

The results are broken down in the chart below:

69% of Buyers are Wrong About Down Payment Needs | MyKCM

 

Rohit Gupta, CEO of Genworth Mortgage Insurance had this to say,

"While first-time homebuyers continue to drive the purchase market, we believe many are staying on the sidelines due to the misconception that a 20 percent down payment is required to secure a mortgage.

There are various low down payment options available today that allow prospective homebuyers to reach their dreams of homeownership sooner. It is crucial that, as an industry, we proactively educate eligible borrowers about solutions that will enable them to buy a home when they're ready."


Homeowner’s Net Worth Is 45x Greater Than A Renter’s

Homeownership is the easiest way to secure your financial wealth and well being in the United States.  Of course, you need to shop for a home that will accomplish your financial goals; This article presents facts and data provided by the Federal Reserve, demonstrating the financial well being between home owners and renters. 

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Every three years, the Federal Reserve conducts a Survey of Consumer Finances in which they collect data across all economic and social groups. Data from 2010-2013, reports that a homeowner’s net worth is 36 times greater than that of a renter ($194,500 vs. $5,400).

In a Forbes article, the National Association of Realtors’ (NAR) Chief Economist Lawrence Yun predicts that by the end of 2016, the net worth gap will widen even further to 45 times greater.

The graph below demonstrates the results of the last two Federal Reserve studies and Yun’s prediction:

Fresh Look wealth gap

Put Your Housing Cost to Work for You

As we’ve said before, simply put, homeownership is a form of ‘forced savings.’ Every time you pay your mortgage, you are contributing to your net worth. Every time you pay your rent, you are contributing to your landlord’s net worth.

The latest National Housing Pulse Survey from NAR reveals that 85% of consumers believe that purchasing a home is a good financial decision. Yun comments:

“Though there will always be discussion about whether to buy or rent, or whether the stock market offers a bigger return than real estate, the reality is that homeowners steadily build wealth. The simplest math shouldn’t be overlooked.” 

Love & Housing

Happy Valentine's day Fresh Look readers! Today's post breaks down the dynamic between love & housing, how romantic <3

According to the National Association of REALTORS most recent Profile of Home Buyers & Sellers, married couples once again dominated the first-time homebuyer statistics in 2016 at 58% of all buyers.

It is no surprise that having two incomes to save for down payments and contribute to monthly housing costs makes buying a home more attainable.

 

First comes Love, then comes Mortgage

But, many couples are also deciding to buy a home before spending what would be a down payment on a wedding, as unmarried couples made up 14% of all first-time buyers last year.

In other words, screw the wedding, lets buy a house!

Here is the breakdown of all first-time homebuyers in 2016 by percentage of all buyers, income, and age: 

 

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All my Single Ladies 

If you’re single, don’t fret! Single women made up 18% of first-time buyers in 2016, while single men accounted for 8% of buyers. One recent article pointed to a sense of responsibility and commitment that drives many single women to want to own their home, rather than rent.

 

Homeownership and Educational Achievement

The National Association of Realtors recently released a study titled 'Social Benefits of Homeownership and Stable Housing.’ The study confirmed a long-standing belief of most Americans:

“Owning a home embodies the promise of individual autonomy and is the aspiration of most American households. Homeownership allows households to accumulate wealth and social status, and is the basis for a number of positive social, economic, family and civic outcomes.”

Today, we want to cover the section of the report that quoted several studies concentrating on the impact homeownership has on educational achievement.

Here are some of the major findings on this issue revealed in the report:

  • The decision to stay in school by teenage students is higher for those raised by home-owning parents compared to those in renter households. 
  • Parental homeownership in low-income neighborhoods has a positive impact on high 
    school graduation.

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  • Though homeownership raises educational outcomes for children, neighborhood stability may have further enhanced the positive outcome.
  • Children of homeowners tend to have higher levels of achievement in math and reading and fewer behavioral problems.
  • Educational opportunities are more prevalent in neighborhoods with high rates of homeownership and community involvement.
  • The average child of homeowners is significantly more likely to achieve a higher level of education and, thereby, a higher level of earnings.

Homeowners Enjoy Stability & Wealth Creation

 

The most recent Housing Pulse Survey released by the National Association of Realtors revealed that the two major reasons Americans prefer owning their own home instead of renting are:

1) They want the opportunity to build equity; Increase their net worth.

2) They want a stable and safe environment. 


Fresh Look Real Estate has created the "7 Steps to Home Ownership" to simplify the process. Download a free copy of the Buyer Checklist Here.


 

Equity Growth

 

In a recent article by The Mortgage Reports, they report that

buying and owning a home is the essence of ‘The American Dream.’ Each month, your housing payments go toward owning your home instead of renting it; building your personal wealth and assets instead of someone else’s. History has shown that homeownership is a clear path to wealth-building, with property owners boasting a net worth [that is] multiples higher than the net worth of renters.”

 

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Stability & Control

Renters fear unexpected rent increases, the landlord selling & being forced to move, and lack control over their living envionrment.  It begs the question, Why Rent When you Can Buy?

A survey of property managers conducted by rent.com disclosed two reasons tenants should feel less stable with their housing situation: 

  • 68% of property managers predict that rental rates will continue to rise in the next year by an average of 8%.
  • 53% of property managers said that they were more likely to bring in a new tenant at a higher rate than to negotiate and renew a lease with a current tenant they already know.

We can see from these survey results that renting will provide anything but a stable environment in the near future. 

What about control?  Homeowners decide what color to paint the walls, what light fixtures to install, when quiet hours (or aren't).  The truth is homeownership is the only way to truly control your environment, not being subject to the rights of the property owner. 

 

Renting or Buying...Either Way, You're Paying Someone's Mortgage

There are some people who have not purchased homes yet because they are uncomfortable taking on the obligation of a mortgage.  I write about one step to building wealth is trading your rent payment for a mortgage payment.

Everyone should realize that, unless you are living with your parents rent-free, you are paying a mortgage  either yours or your landlord’s- in the form of a rent payment. 

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As Entrepreneur Magazine, explained in their article, “12 Practical Steps to Getting Rich,”

“While renting on a temporary basis isn’t terrible, you should most certainly own the roof over your head if you’re serious about your finances. It won’t make you rich overnight, but by renting, you’re paying someone else’s mortgage. In effect, you’re making someone else rich.”

Christina Boyle, Senior Vice President and head of the Single-Family Sales & Relationship Management organization at Freddie Mac, explains another benefit of securing a mortgage vs. paying rent:

“With a 30-year fixed rate mortgage, you’ll have the certainty & stability of knowing what your mortgage payment will be for the next 30 years – unlike rents which will continue to rise over the next three decades.”

As an owner, your mortgage payment is a form of ‘forced savings’ which allows you to build equity in your home that you can tap into later in life. As a renter, you guarantee the landlord is the person with that equity.

Interest rates are still at historic lows, making it one of the best times to secure a mortgage and make a move into your home, a move into a greater net worth and financial security. 

Learn more about purchasing a home, the Fresh way, like an investor with a long term view:

 

5 Reasons HomeOwners Throw Better Parties


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All that is great, but let's end on a fun note.  Owning a home results in better parties :)

1. There is more room to entertain a large crowd.
2. The kitchen is big enough to make all the appetizers you to try from Pinterest
3. There are multiple TVs to accommodate varying viewing options
4. You can be as loud as you want
5. Yard & Patio for BBQs, keg stands & beer pong
  
Conclusion

Unfortunately, no one can tell you what makes more sense for you, your finances, and your personal feelings toward the issue.  Buying a home is very much a financial decision, a financial decision that influences nearly every other aspect of your life. Ultimately, you will have to decide what is more important to you and your future. No one can make this choice for you. 



 Fresh Look Real Estate How to Buy a Home in 7 Steps

 

Topics: Buy, Broker Resources, real estate, seattle, seattle real estate, Tony Lopez, Fresh look real estate

Antonio Lopez

Written by Antonio Lopez

Antonio Lopez is Founder and Designated Broker at Fresh Look Real Estate. He entered the real estate industry in 2001 working primarily with retail buyers. From there, he expanded into representing sellers, high end clients and investors and began personally investing in 2014. He started Fresh Look in 2016 and loves every day serving his team and his clients!