Do I buy or rent? And how do I decide which of the two is better strategy for me?
I love real estate. But mostly I love what it can do for my financial picture. It is no secret that I own real estate and love investing in it, because of what it can do. A real question to consider, when it comes to your personal residence, is should I own or should I rent. And why one versus the other.
Let’s find out.
Many people go out there and look to buy a home. We were all sold the idea that home ownership is part of the American dream. Therefore everyone must own a home to consider themselves successful.
What many homeowners end up learning, often the hard way, is that their dream of home ownership can quickly turn into a nightmare. So let’s consider all options that can help you make an educated choice that fits you and your lifestyle.
Buy or Rent
I often hear that renting is stupid. Folks who make that statement, follow up with an argument that renters make others rich by paying off someone else’s mortgage. By renting your personal residence, you are throwing money out the window, instead of putting money towards something that will be yours.
This line of thinking makes a home ownership a must, even when it doesn’t make financial sense. Even when you are overpaying. Or getting a mortgage that is barely affordable. Because of it, you end up working extra jobs, just to keep that proverbial roof over your head.
This line of thinking makes them “house poor”. Showcasing their large home, they can’t afford, so that others can gawk at how successful they are. Because of financial over extension, you and I know, that they are not able to afford anything more than just paying this large burden. Being financially strapped in a house is no longer is fun to come. Any small emergency can completely paralyze them.
The New Way To Think
As a financial strategist, I always like to look at what the numbers tell me, before I make a decision. Whether you want to own or lease a home, it is important to look at the numbers. Doing this can help you make an educated decision.
I can’t advise you whether you should or should not buy. It is not my place to decide that for you. What I would like to do is tease out the answer that you have already.
I consider whether owning is cheaper than renting. By looking at the cost of ownership and cost of renting, both in time and money, we can decide for ourselves what is more important.
If you decide to own a home because your goal is investment, then purchasing your own home may not be the answer. However, if you can afford to buy a house as a place to live for years, or even decades, then purchasing your home may be a great idea.
For those looking for a good place to live but who do not want to spend their weekend fixing stuff, renting may be a better option. Renting allows you the freedom to move around. And renting may make more sense when the prices of homes for purchases are so high that math does not support buying.
That doesn’t mean that I believe that investing in real estate is a bad idea. It can be. And it can be the greatest investment you’ve ever made. I invest in real estate and believe it to be one of the best assets that one can put their money towards to grow their wealth. But you have to know your numbers to be successful in this venture.
Should I Buy or Rent?
It depends. If you have resources to afford your own home, are convinced that you’ll remain there for years and decades to come, then perhaps buying is a great idea. But, if you are more of a free spirit that loves to travel, explore and have ability to be mobile, then renting is a much wiser choice.
There are other reasons to think about before moving forward.
When people ask me a question whether they should buy or rent I can never give them a straight answer and here is why. It all depends on:
- where you are in life,
- what your income is,
- how much capital you have,
- where you plan to live,
- what kind of lifestyle you desire,
- and so much more.
Buying a home is a major life decision. One that is just as important as choosing to marry someone.
Here are some principles and questions to consider, to help you make decision well. As yourself the following questions.
Question 1: Can I Really Afford To Buy?
First thing I like to consider is the cost of renting versus buying. More major cities around the world have very expensive homes that simply make it completely not affordable for most individuals.
Your current income may not be able to support making a purchase and the mantra of drive until you can buy may seem like a good idea. But are you really willing to drive a few hours each way, five days a week, between your home and job, for years?
In this situation, there is too much risk and too much stress. If you can barely afford to pay the mortgage and have no money saved up in you emergency fund, buying may cause more stress than happiness. You are looking at a potential financial nightmare, if you do not have substantial savings to cover you in case you lose your job, or something goes wrong with the place.
In this case, don’t buy, rent.
Question 2: Is It Cheaper To Buy or Rent?
In places like Seattle or New York, housing prices are so high that it may not make sense to buy. You would need to have a substantial income. And you’d also need to put a substantial amount of money towards your purchase.
Look at the cost of paying the mortgage in your area and then compare it to the cost of renting. If the cost to own is $3,000 per month, but you can rent the same place for $2,500, it makes more sense to rent.
In the scenario above, I would absolutely rent. I would pocket the difference each month. The difference would go to pay off destructive debt, save up in my contingency fund, and invest in a market that makes financial sense.
Question 3: I Am A Young Professional, Should I Buy?
Perhaps you just completed your formal education and are new to the employment market? Maybe you just started your own business. You are exploring your strengths, your career, your location.
Buying, while you’re still figuring things out, may not make sense. Unless the numbers work out and you know with great deal of certainty that you can rent the place. The rent will need to cover all your expenses of ownership, if and when you decide to move to a new location.
Make sure you account for property management costs in your calculations. Also consider the fact that a tenant may not treat the place as well as you potentially would. Having some money in reserves, to cover any expenses, is also a great idea.
If you plan to buy a home in your new location, you may not be able to qualify, due to your debt to income ratio. Depending on your new location, you may be away for years at a time. Trying to manage something that no longer interests you, can create additional stress.
Question 4: Which One Is Easier To Live In?
Consider your living lifestyle and who you are as a person. As a renter you have many more options of where you can live. Do you want to be in the center of the city where everything is a short walk or bike ride away? Perhaps you prefer the suburbs, where you can have a large back yard and quiet sunsets? Or perhaps, you’d like to be somewhere in between?
As a renter, you can often get an apartment with many amenities, ranging from pool and gym, to golf course, pet sitting, parking, grills, and so on. You often don’t have to worry about landscaping or snow removal and those pesky maintenance issues are only a phone call away.
As an owner, you can, of course, have all of the above. However you will pay quite a bit for it. You’ll also have to pay for maintenance, spend your weekends painting the fence, shovel your driveway, and collect leaves each fall. When something breaks, it’s your responsibility to fix it. Usually there is no simple number you can call to magically solve whatever happened with minimal or no costs.
All these things must be considered in your purchase or lease decision.
Question 5: How Do I Invest In Real Estate, Without Owning A Home?
This may be the most important question yet.
Many people believe to be in real estate you must own your home. And in the above answers you’ve likely have seen that perhaps being a renter is a better choice for you. But how can you live where you want to live and still be an investor in real estate?
If you have a good income and have put some money aside, you are ahead of the game and will have an easy time with this strategy.
Consider purchasing an apartment complex. Instead of buying a liability (personal home) you are purchasing an asset. With many doors you can afford to have a property manager to take care of the place and you can even choose to live there as a tenant.
With this strategy, not only will you have a place to live, but if invested correctly, you will be able to generate passive cash flow. That cash flow can not only cover your living expenses, but has a potential to make you financially independent.
This strategy is a great way to have your cake and eat it too. You can have a place to call home and an investment that actually makes sense.
Another method is to participate in a syndication.
Question 6: How Do I Live Where I Want To Live And Invest Where It Makes Sense?
Let your heart guide you on where you want to live. And let the numbers show you where to invest.
Perhaps you are convinced now that buying your own home may not be the best idea for you. But you still want to invest in real estate, as you agree that it’s a good asset to own.
You can rent a place and still invest in real estate in another location.
There are many ways to do this, but I will cover three here:
- Invest in a single-family property or a few
- Invest in an apartment building or complex
- Invest with a syndication group
If you have limited cash and wish to diversify your portfolio, purchasing a single-family home (or a few) may make perfect sense for you. Look for a place where the numbers make sense and find competent professionals to help you buy and manage the place.
If you have substantial cash, you can purchase an apartment building or complex, even if it’s not where you live. You’d follow what I outlined above, without the living in it part.
Finally, if you are looking to make great returns and have cash, but
- don’t want to spend time to learn how,
- are not interested in managing the investment operations
- do not wish to be called when issues arise,
- do not have time to search for investment property
- simply want a hands-off approach of making money,
syndication may be a great option for you.
If you’re still undecided whether you should rent or buy, ask yourself these questions:
- Can you afford it? No = rent
- Is it cheaper to rent or buy? Rent cheaper = rent
- Are you a recent grad or professional? Not stable in life = rent
- What is your lifestyle? Love tinkering around a house = buy
- Do you have the money? Can afford down payment and maintenance = buy
- Achieved financial success? Property is 25% of your net worth or less = buy
Owning your own home shouldn’t create a financial ruin for you. As long as you make a wise decision about your finances, you can be a homeowner, if that is what you want.
For many intelligent investors, home ownership is just not the part of the equation. We focus on generating income from real estate and that is the primary reason for owning it.
Whatever your strategy, make sure you don’t confuse being a homeowner with being an investor. These are very different.