Should I Buy or Rent?

I had a discussion the other day with a friend of mine about should a young person buy or rent a property to live in.  The answer is rather complex and consist of many factors including financial and emotional. It also depends on what stage of life you are currently in.  My final conclusion might surprise you.

Reason why you should buy a property

Stability and Freedom

When you buy a property, you gain the right the live there as long as you continue to pay the mortgage and taxes and other associated bills with owning a home. You also get to do what you want with the property within reason. You still need to follow the local laws and HOA regulations.  But you generally have to freedom to do what you want with the property.

You get to stay in the property as long as you like. You decide when it is time to sell. This is especially important if you have children and you want them staying in the same school system. You don’t have to worry about not renewing a rental agreement and being forced to move.

Build Equity

You build equity as you pay off the mortgage and the property appreciates in value.  The equity build up with time can be calculated. However, appreciation is not guaranteed. It depends on the amount of economic growth in your local area.

Tax Benefits

With the recent changes in the federal tax code, the tax benefit of owning your own home has been reduced. The main reason is the state and local property tax deduction is capped at 10,000 dollars. The combination of interest on your mortgage and 10,000 dollars for state and local property taxes has to be greater than 24000 dollars before it becomes beneficial. See my blog from two weeks ago for further thoughts on this.

Reasons you should rent a property

You don’t want to deal with home maintenance issues.

Things will break and/or wear out. When they do, the property owner is responsible to fix them.  If you are a person that doesn’t want to deal with repairs, then you are better off renting and letting the property owner fix things as they break.

You don’t plan to be in the area for a long period of time.

There are of number of cost associated with buying and selling property. These would include Realtor fees, attorney fees, and other miscellaneous transaction costs.  It takes time to recoup these costs versus the rent you pay.  If you don’t plan to be there for an extended period of time, you may want to rent.

Weighing the Pros and Cons of Owning versus Renting your Home.

Length of time living in a particular location

I have looked at the statistics that show during your working career the average person has 10 different jobs. This number changes a little depending on what source you are getting your information from but the number is around ten job changes during your working career.  In watching the beginning on my children’s careers and their friends career, the number of ten job changes in a working career would not surprise me.

If only half of the job changes requires you to sell your house and move to a new location, then you could expect to move approximately 5 times during your working career. Assuming you work from age 20 to age 65, this would be a working career of 45 years.  The average length of time you would stay in one place would be just over 9 years (45/5).  I would expect the number of years per job to be shorter earlier in a working career as you are working for advancement and sorting out what your career actually will be. Hence mobility is more important earlier in a career as compared to later in a career.

Financial Analysis

A one size fits all financial analysis is difficult to do.  The results depend on your particular situation and the real estate market conditions in your local area.  There are locations where property prices are high, property taxes are high, and jobs are plentiful. The oppsite is also true, there are also locations where property prices aee low, propert taxes are low and the number fo jobs are low.  There are also locations where property taxes are low, property prices are low, but jobs are becoming plentiful (Think southern United States) . The old saying “Real Estate Markets are Local” is correct.

I looked at a financial analysis based on a real estate market that has high property prices, high property taxes, and plenty of jobs.  My analysis showed that if you planned to live in an area for at least 6 years, then you would be financially better off to buy then rent.  This analysis looked at the time to recover the transaction cost of buying and selling a home. It also took into account the potential lost income from investing the 20 percent down payment required to purchase a home in other investment opportunities.

An alternative to owning versus renting

I also looked at a third alternative. This alternative is a hybrid of renting and owning.  I looked at buying a rental property in a high growth area where job growth is increasing but property prices are still relatively low.  You rent your home in your local area.  You would purchase the rental property with the down payment money that you would of used to purchase a house you live in. (Note: The key to owing rental property in a location other than where you are living is to have a good management company).

With this strategy, you get to enjoy the benefit of property appreciation, build property equity, and positive cash flow from the rental property.  The tax benefits are different for rental properties and generally more advantageous now with the new tax law. I will discuss this in more detail in a future blog.

When you run the financial analysis on this strategy, it is advantageous to buy in your local area versus rent in your local area if you plan to live in the property for more than ten years.

With this strategy, I have not addressed the other advantage of home ownership and that is stability. The number of job changes projected for a career indicates that you will be moving on average every 9 years.  Stability becomes more and more important as children become older and start going to school.

Conclusion

Considering the above thoughts, I think you would rent early in your career, and buy rental property in a high growth area.  This would allow you to stay mobile and pursue career opportunities. You also start building equity in a property in a high growth area.

As you approach midcareer and your need for mobility is decreasing, You would consider buying your own property to live in to provide a sense of stability for the family.  You can sell the rental property and take the equity to help pay for your new property or you can use the cash flow to help make your personal property payments.

As you approach late career, your need for stability most likely will decrease as the children move out of the house. That may be a time to sell your personal property or refinance your personal property and buy more rental property in a high growth area with the goal of obtaining cash flow to support you as you approach retirement.

It is never too early or too late to analyze your own situation and develop a strategy for how plan to approach whether you rent or own the property you live in. The key is to get started with a strategy and update as often as you need.