The average cost to rent over a lifetime is well over a million dollars and you’ll pay over $2 million to rent in California or New York.
Buying the average home at $440,000 will take you decades and cost over $1.2 million with interest and taxes.
Buying versus renting your home is THE most important financial decision you will ever make!
It’s a decision my family recently had to make moving to Tampa and it’s one you’ll have to make at least once in your lifetime.
Now I’ve said before that buying makes no sense by the numbers but is still the right thing to do financially for most people. Buying a home is like a forced savings plan that can help you save hundreds of thousands for retirement.
Or at least, that used to be the thinking. Right now, something is happening in the housing market that has never happened before. Something we didn’t even see in the housing bubble and it’s totally changing the answer to buy or rent.
The housing market just flipped the script!
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I’m going to show you how that answer has changed, the pros and cons of buying and renting, two ways to know which is right for you and how we answered that question just last month.
Nation, the nerd in me always wants to answer these kinds of questions with the numbers…but sometimes it’s not that easy. Buying a home is worth about a 5% return from not having to rent. You also get price appreciation which has averaged just under 4% but then you have to pay property taxes and maintenance. When all is said and done, the return on home ownership works out to around 5.25% a year
Compare that with the 8% annual return you’d get investing that money in stocks or the 12% return in tech stocks and the answer should be obvious! Rent your home and put that down payment into the market instead!
But while buying a home instead of renting looks dumb on the numbers, it’s actually one of the smartest financial decisions most people can make.
That’s because people are horrible at saving money!
Yeah, I said it. Let’s be honest here folks. Given the choice of saving for retirement or buying that mocha-cocoa-cappuccino…most people would wash it down with a few donuts as well.
But when you buy a home, you’ve got that monthly mortgage payment that’s like a forced savings plan. With every payment, you’re adding a little more equity you can someday cash out.
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Well, that’s what I used to think but this year, everything changed. The housing market has been turned upside-down!
Let’s back up a little because I want you to know the pros and cons of buying or renting, reasons why one makes sense for YOU.
With buying, you get that forced savings plan, a built-in investment even the shopaholics can count on for retirement. You also get a pride of ownership and stability with some studies showing homeowners are happier than renters. You also get deductions on your income taxes for interest and property taxes…and now if I miss any of the pros or cons of either of these, let me know in the comments.
Of course, the downside to buying a home is, you’re at the mercy of the market if you need to sell fast.
With renting a home, you can pack up and move if you don’t like the neighbors.
You’ve also got a predictable monthly expense. When the air conditioner breaks and it feels like you’re cooking people burgers in your Phoenix home, you just call the landlord instead of draining your bank account.
Investing that $30,000 down payment in stocks at an 8% annual return grows to more than $300,000 over 30 years. Buy a home though and you’ll lose nearly $200,000 on the difference in returns.
The downside to renting is, you’re always at the mercy of your landlord. Most states have no law limiting how much rents can be raised or your landlord can always decide to sell the house.
If you do decide to rent, how would it feel to have your dividend stocks pay the rent? OK, dumb question. It would be freakin’ awesome! Check out the video linked below for seven monthly dividend stocks to do just that, seven stocks for monthly cash flow to pay the rent!
And this is normally where the video would end. I give you the pros and cons of buying versus renting and send you on your merry way to decide what’s best for you…
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But the game has changed!
According to the Wall Street Journal, the housing market is seeing something that hasn’t happened in more than 40 years…not even in the housing bubble was it this bad and it’s causing one-in-five home buyers to back out of their contracts in July alone, people that already signed to buy a home saying, “Nope, this changes the decision!”
It could also be one of the first signs of another crash in real estate!
The interest rate on a 30-year mortgage has doubled to 6% this year and home prices have jumped 40% since the start of 2019.
The median home price in the United States is now $440,000…up from just $300,000 in 2019!
Normally you would expect asking rents to keep up with home prices. That home is an investment, if the value goes up then how much the investor makes on rent should go up as well, right?
But that hasn’t happened.
While asking rents are heading higher, they haven’t kept up with home prices.
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You see, because of the eviction moratorium during the pandemic, many landlords didn’t raise rents. Why increase the rent if you can’t evict someone for not paying? Landlords wanted to get something instead of nothing.
In fourth quarter of 2020, the average mortgage payment and asking rent were both about $1,200 a month. Since then, rents are up about 10% nationally to $1,314 in June according to Census Bureau while mortgage payments are up 58% to $1,893
That’s made the mortgage-to-rent tradeoff spike to 1.5-times, buying a home is now one-and-a-half times more expensive than renting…something that hasn’t happened in decades, even during the housing bubble.
Now home price growth slowed in June and home sales have been falling for months. Home buyers are backing out of contracts and that could be the sign of a crash in real estate.
Of course, all these numbers may work out in a general sense…whether it’s better to buy or rent a home for most, but how do YOU tell when you should buy or rent? What is right for you?
Here I want to give you two ways to know exactly when you should buy and when you should keep renting.
First is what I call the BURL rule, B-U-R-L. It stands for ‘buy utility, rent luxury’. The BURL rule is a great common sense idea that says if it’s something you absolutely need then own it. It’s a utility purchase, the minimum you need to get by.
Luxury though is something beyond what you need, it’s that exercise room that you’ll never use or the swimming pool that will cost a grand in maintenance every year. If the home you’re buying includes a lot of luxuries you don’t need, then you should rent.
For example, here in Tampa if we were to buy a four-bedroom house; around 1600 square feet, no pool or fancy bells or whistles, pretty much the minimum we need for three bedrooms and my office…we could get something like that for just under $300,000 or about $170 per square foot.
But before moving, we knew we wanted to live in a community with lots of amenities. We ended up in Cory Lake Isles and…well, for a kid born on the wrong side of the tracks, this place is amazing. We’ve got a community pool with a slide, four parks, a lake with a beach and lakefront right outside the house.
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It’s fun and there’s always something to do but it’s definitely a luxury. The average price of homes in the area right now is $693,000…way over that base utility house we would buy. In fact, even on a 20% down payment, a 30-year mortgage would cost us $4750 a month…way more than this cheap-ass is willing to pay.
So instead of buying the luxury, we’re renting. For $2400 a month, we get all the benefits of the community and save thousands of dollars.
The second way to know whether buying versus renting is best for YOU is going to take some brutal honesty on your part.
Remember when I said buying is the smarter choice even if the numbers don’t make sense? That most renters will end up spending that extra money each month instead of saving and investing it.
Well…are you ‘most’ people?
And before you answer; I know we’re all special, unique little snowflakes and nobody thinks of themselves as given to these human mistakes…but most of us are.
So, think back to times when you’ve had extra money in your budget. How much of it did you save and how much went to buying that treadmill that is now a twelve-hundred dollar coat rack?
Are you someone that saves money regularly and then doesn’t blow it every year? Do you have an investment account you deposit into each month? If not, you might just be better off with that forced savings plan called a home mortgage!
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