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Estate Planning

8

min read

September 15th, 2020

You see it, you like it, you want it, you...rent it?

Knowing when to rent vs when to buy a house.

Renters often remark they are “throwing away money” each time they pay rent.  Sometimes this is the case, sometimes it is not the case.  We’ll help you figure out your smartest financial move by giving our take on the most common reasons for renting vs buying.

How long do you plan on living in that city?

Recent polls report over 40% of millennials plan to move within the next year with the majority moving for a new job or to find a better cost of living.  If this sounds like you then stop reading and keep on renting.  

If it does not, keep reading.

In a year from now, do you think you’ll be making more or less money than you do today?

If you answer is less, keep renting.  

If the answer is more, keep reading.

The reason has less to do with the dollars and more to due with your level of job security.  Typically, those who feel very safe at their job anticipate making more money as time goes on, and people who do not feel they have high job security anticipate making less.  Until you feel very comfortable in the working world, keep renting.

Do you have the savings to pay for repairs?

If your answer is no, keep renting.

If your answer is, I didn’t even think about that...keep reading.

Most people will tell you having the money for the down payment is the most important factor, however, having the money to cover repairs is even more important.  If it’s the middle of summer and your air conditioning goes out, do you have $750+ to install a new AC unit?  What if you have two units and it costs $1,500? (We really don’t want to see you end up with a huge credit card balance after year one of home ownership.)

If your answer to either is no, keep renting.  

If the answer is yes, keep reading.

Can you make the down payment?

If you cannot put down at least 10% of the purchase price and qualify for a mortgage that does not require mortgage insurance nor carries a drastically higher rate, keep renting.  

If you can, keep reading.

Can you put down 20%?

If you cannot, you should really reconsider this decision.  On average, it costs you 6% just to sell your house.  Then factor in the amount you will inevitably put into the home while owning it.  Then look at the amortization schedule to see how little principal you pay down in the first 10 years of your mortgage.  Then look at recent downturns in the market.  Would you have still come out ahead if you had to sell today?

If you can, keep reading.

Is this the best thing you can do with your money?

This is the most important question.  Most people focus on the long-term gains you can make if you sell for house for much more than you paid.  However, many overlook what buying can do to your cash flow in the short term.  Buying can help decrease your expenses as you can have roommates who help with the mortgage payment and utilities.  If you can decrease your monthly expenses by more than you would make by investing the money elsewhere, this could be your best bet.

For example, let’s say you currently pay $1,000 per month.  If you decrease that expense by 20% down to $800 and have a roommate who is paying rent to you (50/50 split so $800 per month), you can handle a mortgage of $1,600 per month AND decrease your living expense by 20%.  Using our example, that’s a quick $2,400 you can save each year.

This is all on the premise you qualify for a mortgage and can responsibly handle the unexpected expenses that may arise with home ownership. 

Let us help you figure this out. We're always happy to provide a free consultation.

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