Sometimes deciding whether to rent or buy is easy. If you're not planning to live in the same neighborhood, city or state for more than five years, renting becomes the more economical option. If you are likely to change jobs or careers and your income might going down, renting is a safer choice.
And if your family needs are changing or will change dramatically over the next five to seven years, you might be better off renting the size home you'll need over the next few years rather than buying one that your family will outgrow.
(There's an old real estate joke: If you want to get married, buy a studio apartment.)
My friend Josh is trying to make the rent vs. buy decision. He shared with me a fancy spreadsheet he created to weigh factors like the opportunity cost of his cash down payment.
Opportunity cost is a business term that essentially compares how much you would earn on your cash if you invested it in one type of investment vs. another. In this case, Josh is trying to determine what he would earn on his cash if he left it in a certificate of deposit rather than using it as a down payment.
He also looked at the costs of buying, financing and selling the property. Loan fees have risen sharply in the wake of the housing and credit crisis. He also had to add in the cost of taxes (not just property taxes, but also local stamp taxes and other taxes and fees charged for escrow accounts). He adjusted the costs upward to include annual maintenance, and I thought he should have added in a few extra bucks to repaint the property when it comes time to sell. After factoring in the costs of buying, financing and selling the property, he then projected that housing prices would continue to fall a little before starting to rise modestly over the next five years.
When Josh compared all of this with the costs of simply renting a similar property, he came to the conclusion that over the first five years, renting is far less expensive than buying a property. In fact, he believes that he would save tens of thousands of dollars simply by renting rather than buying.
But the calculus changes as the years go on and positive appreciation kicks in. At about the five-year mark, buying a home starts to look like a smarter (and less expensive) move than renting.
In fact, that's how real estate should be thought of -- as a longer-term investment. It's only been in the past half-dozen years that the get-rich-quick, no-money-down, flip-for-profit thinking has moved the masses to buy property. Creative and exotic mortgage financing techniques helped those who might not have been able to afford it to buy their dream primary, vacation or rental property.
Historically, agents would tell their buyers that they should plan to live for five to seven years in the home they buy to make money on it. So Josh's calculations prove the old rule: In the long run, buying the right house at the right price with the right financing for the right reasons can make sense financially.
What really changes things is the $8,000 refundable tax credit for first-time buyers or for those who haven't owned a home in the past three years. If you purchase and close on a first home by Dec. 1 and plan to live there as your primary residence, you can qualify for up to an $8,000 refundable tax credit.
To read the rest of the article, http://www.washingtonpost.com/wp-dyn/content/article/2009/04/23/AR2009042304229.html
Charleston, Mount Pleasant, & Hanahan Real Estate For Sale
Matt Naumann – Charleston & Mount Pleasant, SC Real Estate Agent & Entrepreneur
"Taking Real Estate Home Buying, Investing and Selling to the Next Level" is my personal goal. I specialize in using creative strategies to help my clients buy, invest, or sell real estate in the Charleston & Mount Pleasant, SC Real Estate Market. My motto is “There is always a way!” Google or Call me (843) 818-9898 and let’s discuss how I can help you in save $1,000s when you buy, invest, or sell real estate.
