What’s the difference between HOME-flation and RENT-flation? Rent-flation costs a tenant more, every year, while Home-flation increases a property owner’s net worth. If you’ve ever plugged numbers into one of the many “rent vs. buy” comparisons that are available, you’ve likely missed out on this part of the equation. In reality, these comparisons don’t make any sense, unless you live someplace where home values stay the same over time. I’ve never heard of such a place.
Let’s start with some easy numbers. If you buy a home today with 20% down and take out a 30 year fixed rate loan, there is no doubt that your immediate monthly housing expense will be higher than if you rent the same home. However, if you own the home for 30 years and keep the same loan, your monthly payment will stay fixed and at the end of 30 years, you will own the home free and clear. Let’s look at history for a clear picture. The home that I rented 30 years ago was worth about $220,000 at the time, and rent was $1,100/month. Today, that same home is worth about $2,100,000 and rents for about $5,300/month. If I had bought the home 30 years ago, I would now own an asset worth $2,100,000. If I chose to rent, because it was “cheaper” than buying, and stayed put, I would currently be paying almost 5 times as much in rent, and would have no equity in this property. In reality, had I chosen to rent the home and stay put, I likely would have made a decision to move to a much smaller home at some point, because whether I could afford the rent or not, why would I pay that much in rent?!?
Please notice that I used the word “home” in my example above, and not “house.” I mention this because over the years, the most common reasoning that I hear from qualified buyers is that they want to wait a few years until they can afford to buy a house, instead of something less. My example above was actually for an attached home. If you know for certain that you will be in a much stronger position to buy in the near future, holding out might make sense. For most buyers, however, waiting has resulted in much higher purchase prices instead of the ability to buy a better home.
There are some circumstances when I think that someone is better off renting, than buying. The biggest is when they know that they will only be staying in the area for a very short time. While some are able to “flip” a home and sell quickly for a large profit, that’s rare. It usually takes a longer investment for the numbers to make sense.
If you’re just getting started and know for certain that you won’t be able to stay in the home that you can afford today, for very long (because you will outgrow it), take another look at the example above. One of the smartest wealth building strategies that you can use is to keep the smaller home as a rental, when you buy your next home. With a little time, you should be receiving enough rent to cover your costs of ownership, eventually paying off your loan.
Every home purchase is unique. Please feel free to reach out to me at 925-964-5010 or via email at Lisa.Hopkins@Compass.com to discuss your options. It’s never too early to start planning for success.at Lisa.Hopkins@Compass.com. Knowledge is power and it enables you to make well thought out and informed decisions.
