So a few people have asked me my thoughts on whether they should rent or buy. Generally speaking, most people come from a mindset that you should own a home as soon as you can vs. renting and paying someone else’s mortgage.
Which is absolutely true, to a degree.
Here’s a fun flowchart that makes deciding a little too easy:
Should I Rent or Buy Flowchart: Business Insider
And a couple of recent articles on the topic:
Should I Rent or Buy a House? Marketwatch
In This Floundering Housing Market, Should You Buy Or Rent? Forbes
So before I start talking about this in more detail, I’ll put this out right now… I’m RENTING! (gasp…shocker!) 😉
There’s a lot of backstory behind that which I’ll save for another post, but long story short- we owned a place in the city, sold it at a loss and rented in Philly. When the time came for our daughter to start school, we had the opportunity to rent a house behind our closest friends. We had to pay minimally more (around $100/month more than what we were paying in Philly) to be in a bigger house, a better school district and behind our closest friends. So we hopped on it.
Now, although we rented our primary residence, we actually did buy/sell houses during the time that we rented. So we didn’t truly waste all of our money paying someone else’s mortgage.
Renting our primary residence has offered us flexibility that was extremely important to us. I’ve always known that I didn’t want our family to come across the need to move (because of school or work), and then have a hard time selling a house. Between my husband’s job, the kids starting school and being a city girl, we weren’t ready to decide on a place where we wanted to “plant our roots.”
Which leads to where we are today- after almost 6 years of renting- we might actually buy our primary residence.
Mind you, I’m being extremely selective on where we buy, knowing that whatever it is- our goal is to plant our money there and have it be a source of income for us. For example, if whatever we buy is worth $350k after all repairs, the plan would be to stay as close to $280k as we can, leaving around 20% in the property that will grow over time, as the mortgage gets paid down and using those funds to rehab/sell.
We’ve decided that whatever we end up buying, we want to:
1)Not pay retail. This means that whatever we buy, we will likely do a lot of work to it, which may include expanding it, allowing us to add value. This also means that if for some reason something happens and we need to sell, paying below retail will give us some room to price our house lower than the market so that it hopefully sells quickly.
Oh and by the way, just because you are offering less than asking price, does not mean you’re getting a deal. I don’t care if the house is an REO, foreclosure, short sale, etc. I won’t give a lesson here on how I calculate the value of a house, but what is considered to add/take away value to a house varies depending on your local market.
2) Buy in an area that is steady or growing, not just one that we can afford and the house fits our needs
3) Buy in an area where renting the house out will allow us to cash flow, giving us an extra source of income and equity line to tap into in order to re-invest.
So why all the criteria? Mostly, it’s the timing of everything. I’m not a financial advisor, but I understand real estate enough to know that buying a house just to buy because it sounds nice and not seeing how that house fits in with my long term financial/life plan is not ideal for me. Additionally, if all these criteria aren’t met but we get a homerun deal for a big house that probably wouldn’t rent out because renting, we are OK with that because we know we would be able to sell it.
I must share, the biggest benefit of buying your primary residence- is not having to pay capital gains tax- which you would have to pay on the sale of an investment property. You can sell your primary residence and avoid tax on no more than $250k in profits on the sale if you’re single, $500k if you’re married.
So how does this apply to you? What if you want the flexibility of renting, but want the benefits that come along with buying? Here are a few ideas:
1) Buy a multi-unit and live in one of the units.
2) Rent where you live and buy a property in an area that cashflows enough to cover the majority or all of your rent payment. For example, if you’re renting a place for $2k/month, consider buying a property that generates at least $2k amount in rent that you’re paying + more for cash flow- ideally $2500
3) If taking advantage of your local real estate market sounds appealing to you, but you feel it would take a bit of time to understand your market in order to make a move, consider partnering with an investor you trust or has been referred to you, who has the real estate experience you lack. And do your homework on them. You can generate extra income using funds you would have used to buy a house and instead, just lend on a project.
Well there you have it. Now hopefully I didn’t get you more confused on whether or not you are ready to buy!