Wednesday, August 1, 2012

My Philosophy on Renting vs. Owning

First and foremost I would like to start by saying that I believe in real estate. Held over many decades, real estate is a great investment. It stays ahead of inflation (when you buy and hold for at least a 15 year period) and ultimately allows you to utilize your biggest wealth building tool (your income) in unbelievable ways once the home attains 100% equity (i.e. you own it and kill the mortgage).

But so far in my adult life I have rented an apartment as opposed to buying a home. This has been monumental in terms of the total money makeover that I started in 2009. In renting during this time period I have avoided the plethora of “gotcha’s” that typically come with home ownership: appliance replacement, home repairs, tax bills, home maintenance and the like. Not to mention that as a home owner I would be including sinking funds for each and every nook and cranny expense I can think of to avoid, “gotcha” moments.

The point being that in bypassing the aforementioned costs, I have had and used the extra room in my budget to prioritize saving and paying off all debt. But I do not plan to make renting a long term lifestyle as my wife and I are planning to pay cash for our first home. There are a few things I would personally like to see happen before we buy our first home. Beyond “where?” which is a biggie, I would like to see us amass $200,000 in our brokerage account before plucking off our first real estate property, the strategy being that we have a strong balance of assets between: mutual funds, cash and paid for real estate, and not overtly lopsided towards real estate.

Our renting strategy has not been without its own intricate plan. In retrospect we are renting the way we plan to buy a home: at the bottom of the market range in a neighborhood that we love. Currently rent on our apartment takes up 15% of our take home pay, which isn’t too shabby given that we live in an area known for multimillion dollar homes and 1 BR condos starting in the two-hundred thousands. We also carry renter’s insurance that runs close to $10 a month.

My philosophy can be boiled down to this: Rent with a purpose. Over the last 3 years my wife and I have rented the cheapest thing we could find (in a neighborhood we love) and paid off debt and built savings. Now with 0 debt and ample savings, we are continuing to save for our home purchase so that one day rent will be 0% of our take home pay J!

I do get sick occasionally when financial goobers preach on their soapboxes that renting is wasting your money as opposed to home ownership. Well guess what goobers? When you put 0 – 5% down on a home mortgage, regardless of whether it is variable or fixed, you are wasting your money paying interest. Over time you will end up paying much more than the home is worth because of little to nothing down payments as a result of compound interest working against you. Yes the interest is deductible from your taxable income, but I would rather be in a paid for home writing a check to my local church for the tax deduction than paying interest to a bank.

So rent with a purpose, and if you go for a mortgage plan to put at least 20% down on a 15 year fixed rate with a monthly minimum payment that is no more than 25% of your take home pay and 3-6 months worth of expenses set aside in a liquid emergency fund. Don’t rush into a home purchase, plan and build slowly and keep the American dream from becoming a nightmare.

1 comment:

  1. thank you! good advice. 10-15% of your take home is a dream for me.. living in sf i have to pay $2000-25000 for a studio which is 50% of my takehome! cant wait to move out of this ridiculous area, and i need to have a plan!