Hosted By: Wyatt Yates
Money Myth: Buying a Home is Better Than Renting
In this episode, we discuss when it is the smart financial decision to rent versus buy, the benefits of renting, and the additional costs of homeownership. Should you rent or dive into homeownership? Listen to find out.
If you are currently renting and considering buying your own home do the following: (1) Get your financial house in order by paying off your other debts and saving up an emergency fund; (2) Save enough money to cover at least a 10% downpayment, preferably 20%; and (3) Make sure you plan to stay there at least 3-5 years.
Wyatt Yates Host 00:00 Money doesn't have to be complicated. You can achieve financial independence. This podcast gets to the truth behind the money mess you hear from your grandma, your broke uncle, the latest social media influencers and the so-called money experts. Welcome to Money Myths with your host, wyatt Yates. The myth we're going to look at today is buying a home is better than renting, or you may hear people say renting is just like throwing money away. 00:34 I want to start out with just looking at some stats on home ownership. Now, this is from the US Census Bureau. So for the last 30 years, the home ownership rate so a percentage of the population in the United States that owns their own home it's fluctuated anywhere from 64% to 69% of people in the United States own their own home. It peaked out at 69% in 2004 and had a low of 64% around 2016 before it started going back up where the current rate is just under about 66%. So about two-thirds of the people in the United States own their own home and it shouldn't surprise you that the majority of Americans own their own home because the government wants us to own our own home. It helps the economy. A lot of the biggest tax incentives in the tax code and tax breaks or programs are around home ownership and getting more people to own their own home. So it's the classic if everyone's doing it, it's got to be good, right? So home ownership has to be better than renting. Well, I mean, there is some validity in this and it just really depends on where you're at in your life. The one thing home ownership does do in the long run it can be a very wise financial decision because it helps you somewhat fix your living expenses when you reach retirement. Say, you have a fixed interest rate mortgage or you've paid off your mortgage and you own your home outright. The only cost that can change as far as your home ownership or your living expenses are property taxes and insurance, which will go up. I mean, they definitely will go up over time, but you've fixed the majority of your housing costs in your budget, so it's easier when you are in retirement. So in the long run that's a great benefit of home ownership. 02:43 But home ownership isn't always the wisest financial decision, depending on where you're at in your life and what your intentions are over the next three, five years or so. In the short term, renting is almost always the better financial option because home ownership comes with additional cost, additional responsibilities, less flexibility. It isn't for everyone and, depending on what season you are in your life, it might not make the most financial sense for you to pursue home ownership right now, and that's okay. So let's look at some of the additional costs with home ownership and why. A lot of times in the short term, renting is the better option if if you're not sure what your long-term situation is going to be like. So additional costs of home ownership there's three areas you get hit. You get hit upfront while you're owning it and then when you go to sell it. So upfront costs of purchasing are appraisal fees, loan origination costs on your mortgage. Those are fees that you're not going to have if you're just renting. Renting, you may have to put down a security deposit, but you can get that money back. You don't get back your appraisal fee or your loan origination fees. Those are upfront costs that you wouldn't have if you're renting versus owning. 04:08 And while you own the home, the ongoing maintenance or home projects, because every homeowner has some change they want to make to their home. So you have all that is burdened by you now that you own the home. So normal repairs are your responsibility. You're out of pocket on all those home improvement projects and it's pretty safe to assume anywhere from a 1% to 3% of your home's value for ongoing maintenance and home projects per year. It really depends on the age of your home. The newer your home, the less you're going to be spending, because all your age back system and appliances and everything are going to be newer and at the beginning of their useful life. But that 1% to 3% of your home's value that you spend per year you're not going to have if you're renting. 05:02 And then when you go to sell a home it's much more expensive. You're going to have commissions. You're going to have to pay to realtors. Now there are some selling agents now that do fixed fees instead of a percentage. But typically your buyer probably has an agent. So you can plan on anywhere from 4% to 6% of your home's value is going to go to commissions, to real estate agents when you go to sell, which you don't have when you're renting. Your lease is up, you can move. You don't have costs associated with terminating your lease, as long as you do it on time and you're not terminating your rental agreement early. So all of these costs add up and make it really hard in a short timeframe to recoup those costs, because time is your friend with home ownership. The longer you are able to live in the home, the greater chance you're going to have to be able to cover additional costs of owning the home versus renting Now. 06:06 Right now we're in a non-typical real estate environment in the majority of the United States where housing prices are just going crazy as far as year over year appreciation and value. But if you look at historically where home prices increase, what's the average increase in home prices over the last 20, 30, 40, 50, 60 years? Home prices on average increase about, at the rate of inflation, around three to four percent, sometimes a little bit above. Yes, we're in double digits now. But if you look at Historically where they're at, in how they've performed as an asset class over the last several decades, it's slightly above the rate of inflation where they've performed, so it's not Recouping those costs as quickly. So, yeah, we may be in a non typical environment right now with in. Specially in certain markets, like here in the Denver metro area, it's been just crazy what prices are increasing at. But that will normalize as Supply catches up with demand. So in the long term, or on average you can predict that it's gonna be probably around that rate of inflation. 07:26 So it's not a great investment in terms of like what's your return on investment. But it also takes a lot of time to recoup those additional costs of upfront fees, ongoing maintenance, selling costs with your Realtor commissions. So you have to be able to Stay in your home. A good, safe, like rule of thumb I like to say is if you can make it five years in your home, then you'll probably break even. You're gonna increase your chances of being able to break even on the sale. Now it could be as short as one year, depending on what the environment is like in your at that specific time. You know here in Denver if prices increase in 20% over year over year, you know obviously you only need to do it a year, but just say on average, typically you're gonna need to be in the home five years to be able to have it financially makes sense, and that's why short term Renting is almost always better, the better option, because you have more flexibility, you don't have the additional costs and so it's not a bad financial decision, like this myth would say or lead you to believe. 08:38 So if you're renting right now and you're not sure where you want to live, that's completely fine. Don't beat yourself up. Don't fall for the keeping up with the Joneses. I, I need to own my own home because you might be making the best financial decision At this point in your life or what season you're going through. So I just want to summarize this myth and what I've gone over and then get into a little bit of Some things that I always recommend to my clients and to people when they're considering owning their own home. So kind of like checklists of things that you want to make sure you have in place financially for you to increase your chances of it being a wise financial decision and not impacting you negatively, and then we'll get into your action steps. 09:29 So, in summary, we hear it all the time renting is throwing money away. It's better to own your own home than to rent and in the long run this is true I you're able to somewhat fix your living costs. You have the factor of property taxes are gonna keep on going up, insurance is gonna keep going up, but you're not subject to that annual increase of rental rates that a landlord's probably gonna throw at you. So in the long run, it can definitely make sense to own your own home and can be a smart financial decision, especially as you look at your retirement years and being able to fix one of people's biggest expenses in their budget. But in the short term renting almost always pencils out better than owning your own home Because with owning your own home there's additional costs and responsibilities and you have less flexibility. It takes longer to sell your home typically than it would be to get out of a rental agreement or to finish your rental agreement. So with those additional costs and having less flexibility, you have to be able to say I'm gonna stay in this home on average for about five years before it pencils out financially in normal times. So renting if you don't know where you're gonna be in three to five years renting is probably your best option because you are gonna have the flexibility and you're not gonna be subject to what real estate prices are doing and you're not gonna have to worry about whether my home's appreciating enough to recoup all the extra money I'm having to throw in with these additional costs that are upfront and ongoing and the cost of selling. So in the short term it's almost always pencils out better, unless you're in like a hyper increase in value real estate times, which we currently are, so you may be able to shorten that timeframe in some markets, but you can't count on that forever. We're in atypical times right now, so when can home ownership be a good option for you? 11:48 Here's five things I like you to consider whenever you're looking at owning your own home. Number one is you need to have your financial house in order in terms of all your other finances. This means, ideally, you have no other debts, so you have no other obligations, and you have an emergency fund saved up of three to six months of expenses, because when you own a home, emergencies happen and you're the one that has to fix it. So your likelihood of having an emergency increases with home ownership. So I like to see you have that little buffer with that emergency fund saved up. So that's number one have your other finances in order. That gives you more flexibility and freedom to be able to handle the home ownership. 12:43 Number two is to have at least 10%, preferably 20%, saved in a down payment towards the purchase of your house. You hit that 20% mark, you can avoid PMI, which is private mortgage insurance, which increases your cost of owning the home, and it also will help you get better loan terms. So the more you have down, the better loan terms you're gonna have to, where you're gonna have a lower cost associated with having to own your home. So it increases your chances of being able to come out ahead if something came up and you had to sell your home. So I like to see if you could really get to that 20% that's ideal. 10% still gonna get you some really good terms on mortgages, but you'll still have some of that. You'll still have that PMI, but you should be able to maybe get qualified for a conventional loan. That's gonna be a lower cost loan and not one of these low down payment loans that really throw a bunch of extra fees at you and make it be a more expensive loan. So that's number two having your down payment. 13:54 Number three is if you've kind of figured out where you wanna live and you plan to be there for three, five years. So the longer you're there at your home, the chance that you come out ahead is gonna increase. So If you're not sure where you want to live in the next three to five years or what you're going to be doing for your job and maybe you'll have to relocate, for that it probably doesn't make sense to buy it because you're setting yourself up for if there's a downturn in the real estate market. You might not come out ahead when you go to sell, may take longer to go to sell it and you're going to get stuck with a big financial burden. So I like to see somebody that's wanting to live there over the long term before you buy your home. 14:48 The next thing is depending on the market you're in. So this is number four. Depending on the market you're in, it may make more sense, because rents are so much lower than what housing prices are, to rent. So if you're in a market where rental rates are way lower than what your housing costs would be if you own your own home, it may make sense to rent instead. Now you can offset this some by the more you offer down payment that's going to increase your or decrease what it costs you to live there. But if you're in a market where rents are way lower than mortgages or housing prices, it could make sense for you to rent instead of buy. 15:31 And lastly, number five depending on what season you are in your life, you may not be able to physically take on the responsibility of maintaining your home or want that responsibility. So it may be more beneficial for you to rent to where you can rely on other people to take care of the repairs or things that come up that need you. If you're later in life and maybe you need to be in like a sister living type situation or something, owning doesn't make sense. So if you can't physically take on that responsibility or don't want to take on that responsibility of maintaining your home or your asset, then renting could make more sense. So those are kind of the five things I like to look at on. 16:22 Are you ready for home ownership or does it make sense for you? Just to summarize those real quickly again number one is have your financial house in order, with minimal debts, with your other debts and having that emergency fund saved up of at least three to six months in expenses saved up in savings. Number two is your down payment. Have an at least 10%, preferably 20%, saved for down payment on that home. Number three is being able to say you're going to live there at least three to five years. And number four is if the market in your area for rents are significantly less than what it costs to own a home, it may make more sense to rent versus own. And lastly, number five is if you are unable to or don't want the responsibility of maintaining your home, it would make sense to rent versus buy and those are perfectly fine financial decisions. If you follow these, you don't have to own your own home. It's not necessary. In the long term it can be good and I would probably recommend that you have a long term plan to where, eventually, you do do that, to where you can lock in your cost of living. But in the short term it could make more sense and usually pencils out to rent versus buy. 17:52 As far as the action steps this week, I want you to look at those five things on Are am I ready to buy or should I rent versus buy? So look at those things. If you're currently renting and wanting to or thinking of Buying a home, look at those five things. First, get your financial house in order, pay off your debts, get that emergency fund saved up and then, second, start Saving away each month for that down payment. The bigger down payment you can get, the better and the better terms you're going to get on your mortgage and it's going to be able to pencil out better. 18:32 And then, where do you want to be? 18:35 Where do you want to live? How's your job situation? You know, if you're looking to Move in the short term, owning doesn't make sense for you right now or you want to have that flexibility, move around, owning doesn't make sense. But once you figure out and you're pretty stable in your job or where you want to be and this is the place or the area I want to live in the long term then make that decision to Put some roots down and buy the home. But if that's not the season you're in right now, don't beat yourself up. It's not a bad financial decision to rent in the short term. 19:16 Don't listen to everybody that's telling you that you're just throwing your money away. Make wise financial decisions and look at the big picture. There is no good reason to rush into home ownership if you're not ready. You're only setting yourself up for financial headaches and stress. Thanks for listening. 19:43 Want to achieve financial independence? 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