Don’t Rent Because It Seems Cheaper
Should you rent a home instead of buying simple because paying the rent seems so much cheaper compared to the cost of home?
It could be making a common mistake renting a home instead of buying one simply because renting seems cheaper.
When you go out today to look at the prices of homes, you are likely to find it in the range of several hundreds of thousands of dollars. Your rent may seem insignificant compared to this cost. However, you must stop to consider your monthly renting expenses to your monthly cost of owning a home.
Typically speaking, you save money in the long run by buying a home rather than renting a comparable home today. One of the reasons is that all the costs associated with renting home are affected by inflation.
At a modest inflation rate of 5%, you rent will more than double in the next 20 years.
The prices of real estate are rising and not in tandem with the increase in income for most people. You will be able to buy ‘less’ home for the same money in the future than you could today.
In some areas the prices of homes are rising so fast that it makes sense to purchase a home as soon as you can.
To compare your rent to a mortgage loan, for the same monthly payment, you can typically afford a home loan that is 200 times the rent.
So, for example, if you are paying $1000 per month as rent, you can afford to take a home loan of 200 * $1000 = $200,000. You will still be paying the same amount every month.
Not only will he or prices become unaffordable in the near future because your income will not keep pace with the rising real estate prices but you also stand to make an extremely good return on this investment.
If the value of your home grows fast, your home is going to be an extremely valuable financial asset as well as financial security. You should understand that your decision to rent versus buy a home will affect your housing cost, not just this year but also for many years and decades to come.
Not Buying A Home Because of Job Insecurity
The biggest chief executives of companies, athletes and even movie stars are insecure about their jobs. Being insecure about your job is quite natural. Job loss fears can easily make you insecure about buying a home if you take on the obligation of paying of a monthly mortgage.
- The truth however is that a majority of people should not worry about job loss when it comes to buying a home.
This does not mean that you will not lose your job but within a reasonable time giving your skills and abilities you are likely to find another job and be able climb back on your feet in a comparable career position.
- The current economic scenario might make people even more insecure about their jobs and financial stability in the future. But if you start working towards it today by saving money and not living beyond your means, purchasing a home should not be as much a problem as you might make it out to be.
Many people who had to face foreclosure when the real estate boom ended, had to do with people purchasing beyond their means and spending more than they earned. Living on credit has always been dangerous and if you want to figure in the factor of purchasing a home in the near future, you need to start planning for it.
- The key here is to save. You need a cushion of 6 months of expenses at least, so that even if your job is gone, you have plenty of time to stay afloat, keep making your mortgage payment, and get a new job.
- However, if you think losing a job is a high likelihood and especially if you need to relocate for a new job, you should consider postponing the decision to purchase a home until your employment situation stabilises.
Cannot Find The Right Home
Are you renting because you cannot seem to find your perfect home? Yes, its true that it takes time to find the home you want. But please ensure that you expectations are realistic. If you cannot find find the right house because the ones that you want are always too expensive, you may need to revaluate your requirements.
Look harder. It takes time and perseverance to find a home you want. So make sure you are really looking.
Mostly everybody buys a home at some point or the other. However, not at every stage and at any given point of time in their lives.
Less Than Paying Rent
The main advantage of the home ownership should be that it should be less expensive than renting. Many people do not stop to consider this but there is a simple calculation that you can use to compare the amount of rent that you are paying and and the amount of home that you can purchase with the same monthly expense.
The simplest way to calculate this is to multiply your monthly home rent by 200. The figure that you come to is the value of the home that you can afford to purchase by paying the same amount as your monthly rent as your monthly mortgage installment. Your monthly rent might seem extremely cheap as compared to the price of purchasing a home. But once you do this simple calculation, it might not seem so cheap anymore.
For example, let us say that you are paying monthly rent of $1000. When you multiply $1000 with 200 you get the amount of $200,000. So typically, you can afford to purchase a home for $200,000 instead of paying a rent of $1000 per month.
Do not forget the fact that when you own the home, even if the mortgage payment is higher than renting, the payment is going towards making you the owner of a great financial asset that will appreciate in value over the years. The built up equity in the house can be a valuable source of money when you need it for important purpose or make you life after retirement all that more comfortable.
Beat Rising Inflation
Another advantage of owning a home is that major cost of home ownership which will be your monthly mortgage payment, is not affected by the inflation rate.
That is, if you have a fixed-rate mortgage where the monthly payment is locked for the entire duration of the loan. As long as you keep renting a house, all the costs associated with the home are liable to increase with inflation including the monthly rent.
Taking a moderate inflation rate of 5% per year, a rent of $1000 per month with more than doubled in 20 years. And so will the prices of the homes.
In fact, you might quickly find that the prices of the home have gone beyond your reach in the next few years. By purchasing home, you are safeguarding yourself from the rising inflation costs. You should also note that home prices tend to increase at a faster rate than the inflation.
So in the future you are likely to be able to purchase ‘less’ home than you could today for the same amount of money.
Consider when you are middle-aged or looking at retirement. Do not underestimate the number of years of housing you need because the US health statistics indicate that at the age of 50 you have a life expectancy of nearly 30 more years. And at the age of 65 you can expect to live for nearly 20 more years. By purchasing home and using a fixed-rate mortgage, you are securing your housing expense against inflation and fluctuation in the future. If you continue to rent, these costs will increase.
You are always going to need a place to live. Over the long-term inflation has almost always been around.
Even if you have to stretch yourself a little bit today to purchase a home, in the years ahead you are going to be glad you did it.
The danger with renting long-term is that all of your housing costs increase over time. This does not mean that everybody should buy because of inflation but if you are not going to buy now then you at least need to plan for the future carefully. You need to prepare for the rising housing costs. Housing in prime locations and major residential areas is only going to get harder and more expensive to find.
Avoid Unpleasant Landlords
One of the great advantages of owning your own home is that you do not have to deal with unpleasant landlords.
The problem with many landlords is that they are slow to make expenses on property maintenance and improvements.
While the smarter landlords realize that by up-keeping their property and maintaining it will attract better tenants and a better rent, several are of the mentality that they can maximize their profit by being stingy about the maintenance cost.
However, when you own your house, you will be completely responsible about finding responsible and good contractors to do any repairs and improvements in your house.
While you can bring about any changes like changing the floors, paint on the walls, modernizing your kitchen and bathrooms, you will have to undertake the job of managing all this yourself.
As difficult as it is for landlords to find good tenants, it is probably just as difficult to find good landlords.
Apart from being problematic as far as spending money on property maintenance and repairs is concerned, the landlord may decide to sell the property and force you to move.
For this reason it is important to include a clause in the lease contract that guarantees user the right to renew your annual lease for a certain number of years even if there is a change in the building ownership. Unless the landlord is already expecting to sell the property, he should be delighted in knowing that you are expecting to stay for some time and he will not have to look for new tenants in the very near future.
Make The House Your Own
The great relief of owning your own home is that will you can do whatever changes you like. Many people do the same when they rent the home but this is not usually recommended.
Any improvements that you make on a rented property costs you time and money and benefits the landlord financially. If you can convince your landlord to take on the expense of repairs and improvements at their expense then great. Otherwise spending on a rented home might make you happy during the time that you are living there but will end up as a loss to you and gain to the landlord once you have to move. When you have a place of your own you can do anything and everything like putting in hard wood floors, changing the carpeting, changing the paint the walls etc.
When you own the home and you want to make changes, keep 2 things in mind.
Do not make the house too strange.
If you need to sell your house in the future, the more strange and outrages you made it, if you buy as it will appeal to. For this reason focus on the improvements that add value to the house such as skylights, a deck for outdoor living area, updated kitchens and modern bathrooms and so on.
Do not overextending your finances.
It is a very common reaction would people who purchase their homes to get excited and want to do several new things to make their homes more attractive and habitable. However, you should take a deep breath and give yourself some time to settle down before you do any major remodeling or changes in the home. Changing, improving and remodeling is going to cost money. Never lose focus of other important financial goals such as saving for retirement, children’s marriage or college education. When deciding to spend on renovation on the home spending more than what you can afford on your home can not only interfere with other important financial goals but also get you into significant debt and even build up high interest consumer debt as a prelude to bankruptcy.