And other questions you should ask before buying a home…
Many articles have been written on the buying vs renting question when it comes to buying a home, but most of the analysis tends to center on the dollars and cents side of the question. We read about tax advantages, investment potential, home buyer tax credits, income ratios?all important considerations, but all essentially monetary in nature.
Rather than crunching numbers, I?d like to consider the buying vs renting question from a mostly non-monetary angle, and discuss factors which are of at least equal importance in making the decision to buy or rent a home. Most have to do with lifestyles, attitudes and future prospects.
Employment mobility in the buying vs renting debate
How stable is your job? That?s a question that probably didn?t need to be asked a decade or more ago, but it?s crucial now. It isn?t just that jobs have become less certain, but also because the ability to profitably flip a house every 3-5 years to follow a new job isn?t an option any more.
People who work in healthcare, education, local government, or who are self-employed in established local businesses have the kind stability that supports long term home ownership. And almost ironically, having a successful portable business – one that isn?t dependent on location – can also provide stability.
However, if you?ve found yourself experiencing regular job transfers, extended periods of unemployment or if you work in a location where parallel opportunities in your line of work are rare, renting may be the better option.
Do you have, or plan to have a family?
A family is a major reason to own a home. Room to grow and a sense of permanence can?t be measured in money alone. Even more compelling: if you have – or expect to have – an aging family member to care for in your home, owning will be the better choice.
Activities, hobbies and trades
From a pure financial standpoint, it may be cheaper to rent, but what if you like to work out and have a lot of exercise equipment? You probably won?t be able to store it – let alone use it – if you live in an apartment.
Likewise, you probably will be unable to create a garden, keep more than a single pet or run a plumbing business out of a house that you rent. If you have activities that are an integral part of your life or livelihood, you?re probably better off owning your home, even if it costs more money to do so.
It?s gotten much more difficult to qualify for a mortgage to purchase a home with a minimal down payment. The most basic alternative is a larger down payment, typically at least 20% of the purchase price.
I’ve never seen or heard this come up as a serious consideration in the buying vs renting debate, but there’s a lot at stake. We?re talking $100,000 on a $500,000 house, and that will be dead equity. You won?t be able to tap it for emergencies, investments, to buy a car or to help a sick or struggling relative. (Note: home equity lines are no longer easy to get!)
Do you have sufficient funds available for these contingencies over and above your down payment? Are you OK having most or all of your money tied up in a single asset? If not, renting may be the better option.
Would you buy a house if it didn?t rise in value?
The house price spiral of recent decades has fostered a sense of necessity: buy now or it will cost more later. Simply put, higher prices drove higher prices. Real estate turned into a tangible get-rich-quick scheme forcing us to buy in as early as possible. A house was no longer a home, but an investment, and like all investments, it succumbed to the boom/bust cycle.
If a house won?t be an investment?meaning it won?t be worth substantially more in X number of years?would you still want to buy it?
Life in transition
During my many years in the mortgage business I?d often wonder why a person coming fresh out of college, a divorce or a financial catastrophe would feel compelled to buy a home. I?ve always suspected it had to do with that price spiral discussed above.
Is an immediate home purchase the right course for newlyweds? I?ve seen a sufficient number of recent marriages break up within the first two or three years, complicated by a house that needed to be disposed of. In today?s market, selling that soon will most likely require the seller to write a check at the closing table.
If you?re in a period of natural transition, such as those listed above, would you not be better off renting until your life becomes more settled?
Repairs, maintenance and remodeling
These are the great variables that most would-be homeowners ignore. Fact: even if your projected mortgage payment is no higher than your current rent payment, it will still cost you more to own a house than to rent. In a typical house, repairs and maintenance can average several thousand dollars per year; periodic remodeling can run in the tens of thousands. Are you prepared for this?
How much do you like your free time?
Repairs and maintenance will cost not only money, but also time. As an owner, you?ll need to maintain your lawn, fix what breaks, shovel snow and handle any chore your landlord is probably doing for you now. Generally speaking, owning means less free time.
If you have a job or business that takes up most of your time, owning your own home could compete with that. Are you a fitness buff? Owning may compete with that as well.
Alternatively, if you have a family, taking care of the home together can be a shared experience, as you maintain and improve the home as a joint venture.
Buy with the intent of paying off your mortgage
The concept is virtually old fashioned, but how many people buy a house with not only the intention, but also a plan for paying off the mortgage ahead of schedule? If your house doesn?t rise in value over the next 10-20 years, the primary investment value of owning will be paying it off to own it free and clear as soon as possible.
Are you committed to doing this?
Buying beneath your means
The real estate industry has done a superb job of convincing home buyers to purchase at the maximum of their ability, or even higher. More than a few homeowners are now facing the fallout of that choice. Alas, deep recessions and house price declines are not only possible but here we are.
When you buy at the maximum of your affordability you deny yourself any flexibility in the event that perfect world assumptions don?t pan out. If possible, purchase a house that?s about 1/3 below your maximum; if you lose your job, you probably will be able to get one that pays 1/3 less than you now make in a relatively short period of time.
In the meantime, you?ll be able to save some money in case that rainy day comes. If it never comes, you may be in a position to accumulate some real wealth, a little at a time!
Are you ready to buy beneath your means? If you aren?t, then ego may be driving your purchase decision more than logic or good sense.
Neither owning nor renting is the right choice for everyone, but owning clearly carries greater risks. Have you considered or prepared for those risks?
Can you think of any other non-monetary factors that should be considered in deciding to buy or rent a home?