Episode 15: Should I Rent? Or Should I Buy?
Why would you choose to rent instead of buy a home? As a real estate agent, Lori knows some things. To be honest, it's a different decision and game plan for everyone.
Takeaways:
1. What are your goals for financial wealth?
2. How much control and freedom do you want?
3. What about the real estate market?
4. What are the pros and cons?
5. Who do I talk to to make a choice?
Did you watch our video on how to clean your windows? Check it out here!
So you’ve been thinking about moving. And now you’re faced with the decision: to rent or to own?
Is it going to be worth the investment? Is it worth your time?
Check out Part 2 to this topic here.
The Question:
Why would I buy a house if I can just rent one?
Is one better than the other?
It depends on your goals.
Do you want to grow your financial wealth?
If you do, how do you want to do it?
Home ownership
Additional homes
Real estate investments
Or something else like stocks, and bonds, etc.
As you rent, think about this. Someone else owns the property.
And you, Mr. Tenant, are paying for it. And eventually it’ll be paid off and I, Mr. Landlord Owner, will enjoy the cashflow, or I may choose to sell it. And you, Mr. Tenant, will need to move out.
Ouch.
What side makes more sense?
When you rent, you need to make a continual monthly payment.
Hopefully, the payment doesn’t increase out of your budget over time. But, most landlords will increase rent over time. And then you may need to move.
Your rent is going to be to the current market value, and in good business sense, the Landlord may increase your rent. Often there is a 30 day notice, or 60 day notice.
We know, rent can be expensive.
Locally, here in Southern California, an average apartment like a 1 bed, 2 bath, or so is going to be about $1,800-$2,100.
And for a house, depending on your down payment, it could range between $2,500-$3,600 a month. And that’s when you need to talk to a great mortgage lender to find out what you’re in for.
When you own, your payment is locked in. It’s not going to shift unless you choose, because you’re locked in to a “30 year” mortgage. When you rent, the Landlord will follow the market value.
Your decision depends on what’s most affordable and what your goals are for you during that time.
What are some other differences between renting and buying?
You may be limited to what you customize in your home.
You have less control over a home you rent.
You have more control over a home you own.
110%.
For example, a Landlord may love his property so much that he says, “you may not paint the interior of my house at all. Period. Don’t even ask.” Or they could be the other extreme, and casually say, “You can do whatever you like, you just need to return it to me in the condition that it was given to you.”
Both sides benefit the Landlord of course. They don’t have to pay for the reinvestment to get it ready for the market again for the next Tenant, and the current Tenant is paying off the property for them. It’s a win win win for them.
When you own a home, you have complete freedom.
Want to paint it purple? Sure! Well, generally that’s okay. If you live in an HOA (Home Owners Association) that may be a different story.
You can customize your home and your living space to your heart’s desire. You can restructure, make interior additions, exterior additions. But of course, the government wants a piece of that value. So if you choose to make those kinds of changes you will need to get permits and licenses to do that.
Another benefit of choosing do own a home it you get to enjoy it as you look around and say, “Yes, this is mine.”
Lori recommends that you reinvest in your property every couple of years, or every year if you can. Refinancing is a great way to consider doing that if it’s right for you.
Another difference in renting versus owning: Fees
If you rent, you’ll likely pay rent fees, a security deposit (or first and last month’s rent).
Here’s something to note if you didn’t know: the state of California does not allow for paying a security deposit and you first and last month’s rent. It’s truly only the security deposit and your first month’s rent. That security deposit is not considered your last month’s rent, as many people may think it is.
Trying to rent a house may almost cost as much in fees as trying to buy a house.
What makes better use for your money?
As a first time home buyer you may reasonably put down $6,000-$8,000 on a house to rent for 1-2 years. And you could be putting $6,000-$8,000 on a house you can own for the next 30 years.
So would you want a $6,000-$8,000 investment for 2 years? or 30 years?
Here is a great example from one of Lori’s client’s opinions.
“Why would I rent anywhere else, when I own my house and the government gives me a yearly credit at the end of the year on my taxes?”
If he gets around $10,000 at the end of tax season, that’s essentially about $800 a month in return. And if his rent is $2,500 a month, minus the $800, that brings him to about $1,700 a month in retrospect.
So he is living in a 3 bedroom, two bath, single story, pool home, in Rancho Cucamonga for about $1,700 a month.
And everyone else around the corner may be renting a 2 bedroom, 2 bathroom, pet fee, laundry fee, etc fee for about $2,100 a month.
The choice is yours.
But maybe your situation is specific.
“I move all the time.”
You always need a place to live. If you move, because you never know what the future holds, why not rent out your old property? It’s something to consider. And if you don’t want to be a Landlord, you can choose to sell it, and depending on the market, recover some of that investment.
But of course, as a realtor, Lori says, “Why wouldn’t you want to keep real estate?”
Whenever a client approaches Lori with, “I want to talk to you about selling my house,” she says “Why don’t you think about keeping it?”
And Lori totally knows that doesn’t make sense on the business end, but it’s not about the money. It’s about what makes the best financial sense for the client, for you.
The reality is, the longer you can keep real estate, the more money you will make off of it. Just ask your grandparents how much they paid for their first house.
Lori lives in about a $700,000-$800,000 neighborhood. And just around the corner is a $1 million neighborhood. One day she talked to a few of those homeowners and they told her they had bought those homes for about $130,000 about 30 years ago, which of course was a lot more money back then.
But, that $130,000 investment looks pretty good right about now. Now they’re sitting on about $1 million in real estate.
“What if the market value drops?”
Well, the reality is, who cares? You still need a place to live. And so long as you’re still employed, you can make your payments and have the opportunity to stay in that same home. When the market value drops, sure rent prices are going to fluctuate, and rent prices will decrease, or may increase per high demand for rent. So by securing your property, your home, your own place. you will always secure your monthly expenses.
How do I buy a house?
It’s simple. Start by talking to a great lender and go from there. If you need a recommendation for someone we trust, just ask! Or check out our preferred vendors. We don’t get anything for referring you other than a great high five! But we know and trust them to do the right thing for our clients.
Refinancing
When you purchase a home, you can refinance.
If Lori’s personal home ownership story (listen to more about it here), she talks about her experience during the market crash of 2009. In brief, she bought her 3rd house at the top of the market with an interest rate of 6% (ouch). And then, when the market finally recovered, about 6 years later, and wasn’t so pricey, chose to refinance.
Equity is the amount of money you grow in your property over time. So when the market increases, you have more value, and when it depreciates, you have less value.
She had a 30 year mortgage with a 6% interest rate and 20% equity.
When the market crashed, her 20% equity was gone. When it started to recover, the 20% equity returned.
And in that moment she decided to refinance (changing her old mortgage for a new one).
And with that refinance she had a 15 year mortgage with a 3.5% interest rate.
Dropping 7 years of time off of her mortgage.
And that’s a lot of saved money.
Other Finance Options
Make your money work for you.
What if I don’t have money saved for a down payment?
There are even opportunities to purchase a home with 0% down if you’re a Veteran.
Some have 1%, 3%, and a variety of options. That’s why you just need to start the conversation with your lender, or a realtor, and find out how you can make that dream happen. You never know what’s possible until you ask the question.
In Conclusion
But what if I still want to rent?
There is nothing wrong if that is what you want to do. It can make best sense to rent for you, especially if it’s for a temporary amount of time. Maybe you’re new to the neighborhood and not quite sure you want to plant roots there, maybe you need to boost your credit score, or if it’s a good decision to buy just yet, cool. That’s okay. Rent for a year, feel it out, and reassess later. It doesn’t make sense to buy a house and move in a year because of the financial costs of buying and relocating. When considering buying, the more long term the better.
But here is the reality, from a realtor’s perspective. You should really invest into real estate. It makes great financial sense. It gives you security. It gives you a place to call home. It encourages responsibility. It increases your net worth.
It’s a personal choice. You just need a game plan. So start thinking.
Call us and find out what’s best for you.
909-227-4196
Thanks so much for reading. We look forward to helping you with your real estate goals.
Check out Part 2 to this topic here.
Lori Alvarez has been in the Real Estate Industry for almost 15 years. If you’d like to contact her call her at 909-227-4196. She loves helping families find their home sweet home.
Our podcast is geared towards our current clients. We love to give our buyers and sellers great information. Wondering about something we haven’t covered? Send us a message.
Thanks for reading. What’s going to be your next step to finding your home sweet home?
Real Estate is an ongoing, beautiful story. That’s why we love to share ours and to help you begin yours! Tune in to the next episode where we will continue the conversation.
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