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.
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.
Dead equity
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?
“Buying beneath your means”
Well said! Probably the best advice that rarely, if never, gets promoted since it hurts GDP.
Matt – I agree, it’s probably the best single piece of advice on buying a home from a personal finance standpoint.
You’re right about the GDP connection though. But it seems to me that millions of homeowners living beneath their means would ultimately be even better for the economy. I doubt we’d be in the housing slump we’re in now if that were the case.
This is a great perspective and are important factors to consider.
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Great points! Matt I wholeheartedly agree with you – I remember when we bought our first house several years ago and was amazed at what we “qualified for”. I looked at that figure compared to what we could afford and thought to myself, “I wonder how many people believe that because they qualified for this amount they think they can afford it?”
Jason – It’s amazing how many people fixate on the loan amount qualified for as if to believe “the bank thinks we can afford it, so obviously we can.” What’s worse is when they get that top number, go out looking for a property and come back with one that’s priced even higher!
The first step should be to look at your budget and come up with a monthly that won’t have you living house poor, in conjunction with a down payment that won’t leave you broke.
There tends to be a bit too much optimism when people are buying, especially if it’s a first home.
The one thing renters don’t realize is that once you “buy” your home, there is this infinite priceless feeling you experience that can’t be quantified. You feel set, you plant roots, you feel like you’ve “arrived.”
Just make sure when you buy, you don’t go anywhere for 5 years!
Financial Samurai – I completely agree with both your points, but especially the last one! Flipping ain’t what it used to be and five years would probably be the minimum.
Great post– The dead equity factor really resonates with me. I am currently contemplating buying a place, but that means there will be less money for investment, my “fun fund”, and many other things! Renovations can be so costly too– the only thing I can afford right now would be a fixer upper. =(
I t depends on what you are doing? If you are working person and have a family and your job is transferable the it is preferable to rent a home.
And if you are a retired person then buying a home is best option for you.
youngandthrifty – in this economy liquidity is huge. You should never be broke after closing on a home purchase, and if you are, you probably need to rethink it. Having a cushion in the bank will affect everything, including our attitudes. The days of stretching the last dollar into a home should be over.
Gillian – I agree with you on a retired person, as long as the house is owned free and clear. For a lot of retirees, carrying a mortgage might make retirement impossible.
Excellent post! My wife and I considered all of these issues when we bought our first home about 16 years ago. Ironically, we’d been holding off buying a home and starting a family (intertwined goals for us) until I felt secure in my job. Since I was in radio back then, that was very difficult! We finally felt secure enough to make both leaps, moving into our house the week after our daughter was born. Three months later, I lost my job! We survived and thrived, particularly because I tried new jobs, all but the first of which paid more than I’d ever made in radio.
One more major factor that we considered is safety. In apartment dwelling, one must trust everyone else in one’s building not to make fatal mistakes: smoking in bed, manufacturing drugs, etc. We lived in one apartment where I served as a manager. The owner and I had to clean up after a resident’s suicide attempt. As we worked, I realized that the building used gas for stoves–the suicide could have tried that method, which might have led to a catastrophic explosion! Once we moved into our own house, I slept much easier, knowing that any accidents were ours alone–we were no longer at the mercy of other people’s judgment.
Hey Kevin,
Yes you’re soo right. Our economy is in such a fragile state right now. It’d be very foolish to jump into a mortgage that is too “tight” (e.g. both of us are stretching our budget in order to own). You never know if layoffs might happen…! I am holding off on buying anything too expensive to build my cushion (to offset the dead equity).
Great article. Thanks for the detailed analysis. These are definitely the questions someone deciding between renting and buying should ask themselves.
Thanks Precision Team. Though the post is structured as a buy-vs-rent situation, I think more generally that these are also some basic questions anyone considering buying a house should think about as well.
If folks can follow the 30/30/3 rule for home buying, we’d all be in a better place now. Don’t get crazy and fall in love with the property you want to buy!
Good other variables to consider Kevin. Repairs & maintenance are the things people under estimate the most. Thnx
FS – I completely agree. Buying a home can be managed intelligently, but it’s easy to get caught up in the trap of buying too much house. A lot of people are in that mess right now, and that’s most of the people facing foreclosure and losing their homes.
The prospect of being house poor isn’t just a cliche, it’s a reality many people are coming face to face with. In the past, increasing property values have bailed everyone out, but if that’s no longer in the picture, a more conservative approach is the order of the day. The key is buying beneath your means.
Very comprehensive! I think you’ve covered all bases.
I want to buy a place we can make our own and make payments that don’t go to someone else’s mortgage and settle down. But we’re not quite at the stage in life. Not yet…