Renting or Buying? Not always a clear choice
By: G M Potter
Tags: Real Estate, Investment, Home, Personal Finance, Buying A House

Photo by Scott Webb on Unsplash

It seems to many people that the place they want to live — the city, the environment, or the locale — is simply too expensive to consider if they wish to buy a house. This apparent fact is made worse by the equally apparent fact that those places are experiencing rapid price increases for houses. Each day, it seems, the dream of buying a house becomes dimmer and dimmer.

This may be the beginning of an opportunity: an opportunity to change our thinking.

From the standpoint of an investor, and as an advisor to investors, I adhere to the maxim, “What goes up must come down.” This is not to say that once housing prices go up, they will come down. Something else will.

This does mean that the ability to afford the purchase of any particular house may be going up — i.e., less and less affordable — and will surely go down — i.e., become more affordable as an individual’s ability to purchase goes up.

What is affordable for you in a few years may be completely out of reach today.

It isn’t enough to focus on buying a house. A home purchase takes a large investment on your part. To be blunt, it takes some money, and for most of us, it takes a large amount of money. To apply for and become approved for a home loan, at a minimum, usually takes 10% of the purchase price as a down payment. The approval of a mortgage loan also depends on your income and credit history.

Based on what you earn from your chosen profession, does the bank see that you have the ability to pay the mortgage?

In Montana (my “locale”), the amount of money for a down payment can be anywhere from $25,000 to $45,000. This kind of money just doesn’t fall from the sky. It may take years to accumulate and an equal number of years during which we must live frugally and postpone expenses such as vacations and car purchases in order to get there.

Photo by Taylor Young on Unsplash

If this frustrates you, makes you feel unable to find an adequate solution, you are not alone.

Buying a house is a great idea. There are important factors to consider, however.

Pride of ownership is normally strong for the first-time homebuyer; even though, technically, you are three to four months away from losing the house in any given year.

What? You say. But I own it. I have a mortgage and everything.

Technically, you do own it. However, the bank that loaned you the money — ie. The Mortgage Lender — also owns it, and they will take it if you don’t pay them back under the conditions of the loan agreement. Equally, your landlord will ask you to leave their property if you don’t pay them according to the rental agreement.

Here’s the good news.

The Bank does not want the house. They want the money.

Conversely, you don’t want the money. You want the house and what goes into making it a home.

If you don’t have the money for a down payment, or if you simply don’t qualify for a mortgage loan, you can still get what you want if what you want is a home.

Renting a house in order to make it your home may be the smart move.

There is nothing wrong with renting a house. Provided that the landlord is reasonable and law-abiding, and you don’t damage or abuse the property, renting is very much like owning.

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In most cities or locales, renting is actually less expensive on a month to month basis than purchasing the same house. The first step is to grab your calculator or go online to project what a reasonably accurate mortgage payment would be. Assume you could put 10% down and afford all the little extras that go along with homeownership.

After you have calculated a reasonably accurate mortgage payment, stay online because you will need to calculate all those little extras that make homeownership so special.

What are the insurance rates are for this ideal property? You will need a clear idea of what property taxes will be, as well. Are there Homeowners Association Dues involved with the house you are trying to buy? Add this expense to the list.

And, if I can interject here as a former financial advisor, are you ready for appliances to break, and are you able to replace or repair them? You will need to set aside some cash for the unexpected. Now, total up all of these expenses and compare the total monthly amount to renting the same type of house. How does it compare?

These last expenses — Insurance, Property Taxes, and Maintenance — are all the things your landlord pays for. As a renter, you don’t have these responsibilities.

Here is more good news.

If you are trying to find a way to buy a house, remember why you want it. Are you purchasing the house as a rental property, or are you planning to live there yourself and possibly raise a family?

Remember: the bank doesn’t want your house.

You want the house because of how and why and when it can become a home. The important part is what is under the roof, not the roof itself. Does it actually matter if you borrowed $300,000 or more to get it? You can have what is under the roof for much less if you rent.

Photo by Annie Spratt on Unsplash

Do the math to answer some important questions for your specific situation.

How much is rent versus the cost of ownership?

What is the cost of the mortgage loan? (Monthly payment and down payment)

What is the cost of insurance per year?

What is the cost of property taxes in a year?

Are there Homeowners Association Dues involved? How much?

How much does maintenance and repairs cost?