The age old question! As you can imagine, the answer depends on every individual’s personal situation. But, generally speaking, home ownership is the way to go. Following example should outline why owning a home makes sense. Please bear with all the numbers, but they are required to get the point across.
A close friend of mine recently purchased a condo in NJ as an investment and rented it out. He paid $194k for the property with 20% down payment ($39k). So, he had to borrow the remaining $155k from a bank. The loan is a 30 year fixed loan, with $4.125% interest rate. The property tax rate and the association fee for this investment condo are on the higher side, but it made sense because of the location and school district of the property. And of course, there is a small payment towards property insurance. So, let’s summarize the overall monthly cost.
- $751 towards Bank Installment ($155k for 30 years @ 4.125%)
- $0 towards PMI (since 20% down payment)
- $383 towards Property Tax ($4,600 per year)
- $30 towards Property Insurance ($360 per year)
- $356 towards Association Fee
Overall, his monthly cost is $1,520. In comparison, he is charging the tenant $1,725 per month (in line with the ongoing market rate). Effectively, the tenant is paying the mortgage and then some more. So, the question you have to answer for yourself is – Would you rather pay your landlord’s mortgage or your own mortgage?
If you are still not convinced, let’s try this. Over the years to come, the increase in rent will outpace the increase in monthly costs, making it even more lucrative for my friend. And at the end of the 30 years, the loan amount will be paid off and my friend will own the condo free of any bank loan. Not to mention, the market value of the condo (due to inflation, etc.) will be far more than the $194k he has paid now. In comparison, the tenant will have no ownership in the condo whatsoever, despite of having effectively paid the mortgage for all these years.
Now let’s talk about some of the hurdles to home ownership.
I don’t have enough down payment to buy a home. Probably the single largest hurdle to home ownership. I don’t want to make it sound too simple, but you need to bootstrap and put some money away to buy your home. Contrary to popular belief, you do not always need 20% down payment. In fact, the average down payment across the entire nation is about 10%. Also, you can consider starting small by buying a Condo and then upgrading to a bigger place few years down the road.
I am uncertain about the future. Several people are not sure where they will be in 5-10 years from now, whether they will have a job, etc. These uncertainties are very common and apply to most people. But, still 65% of Americans own a home. The point is, sometimes we just have to gather the courage and make that commitment.
An eminent move. The entry and exit costs to home ownership are significant enough that a short holding period may not give you enough time to recover these costs through property appreciation. As a rule of thumb, if you anticipate moving towns and therefore, selling your home in less than 5 years, it probably makes sense for you to rent.
Property maintenance is too much hassle. This is my least favorite excuse. Yes, it is a hassle, but I think it is worth the investment in your future. Yes, it is no longer as easy as calling the landlord; and lawn mowing, snow ploughing aren’t exactly things to look forward to. If maintenance is a hassle and is the roadblock between you and home ownership, townhomes or condos may be more suitable for you.
What if the property prices crash after I buy a home? No one can rule this out completely, but considering that average home prices are still below the 2006-2007 highs, the risk exposure is very limited. Heated housing markets such as San Francisco and Seattle (thanks to the technology boom!) pose a larger downside risk during downturns, but a collapse in property prices is highly unlikely. Consider this – USSTHPI, which is a measure of housing prices across America, has grown by 4.5% year over year (compounded growth) between 1975 to 2015. This includes the last 10 years which haven’t exactly been the best years for real estate. So, if you are in this for a long haul, you will come out a winner!
So, if you are convinced about buying a home, check out ThinkHome.com. It is an innovative home search engine that allows you to search for homes based on factors critical to any home buyer. You can search for homes based on proximity to work location, school quality, available down payment and monthly mortgage budget. Moreover, ThinkHome assigns a score to every home within your search result to rate value for money; a higher score implies lower expenditure towards property tax and commute. This website also provides a detailed breakdown of all costs associated with each listed home, the estimated commute time from each listed home to the user’s work location and relevant school ratings. All critical information in one place!
Anyway, the important thing to keep in mind is that every dollar you spend towards rent is going towards paying your landlord’s mortgage. So, find your dream home now and begin building equity in your home, in your future!
(Visit https://research.stlouisfed.org/fred2/series/USSTHPI# for more statistics on USSTHPI)
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