In 2021, rent or own is the question!
Today, many people are looking at the prices of houses and realizing that they are either outpriced in the location they want to live in or wondering how they will ever get the down payment to own the home they want.
From my experience, most people over-buy the size of the house they buy first. The second mistake they make, in my opinion, is taking out a thirty-year mortgage.
According to the US Census Bureau, only 37 percent of Americans have lived in their homes for more than ten years. This short period is unfortunate. To generate real wealth from real estate, you need to own your property for as long as possible.
Between 2000 – 2009, the average homeownership duration was only about four years. It was too short for building real wealth. As of 2021, the average homeownership duration has risen to roughly 10.5 years. Post-pandemic, people own their homes for longer.
Do you think of your house as an investment?
A house is a terrible investment. Yet, for a lot of people, it’s the best investment.
If you buy a new house, it takes five years or more before the cost of maintenance starts.
If you buy a house older than five years, you will spend 1% to 2% of the cost of the house on maintenance every year.
Stuff breaks. Pipes burst, roofs leak, and occasionally the whole thing burns down. You can have hurricanes, tornados, hail, and ice storms in Texas – the four horsemen of home destruction.
Besides paying for the house, you have to pay the insurance and property taxes and pay for all the other stuff. And that’s on top of the mortgage.
Houses are starting to sound like owning a car. Move-in, and it depreciates; that’s not a good investment.
But house prices go up over time.
Of course, they do. A house I owned in 1982 in Richardson, Texas, which I purchased for $52,000, is now worth approximately $350,00. Yes, Virginia, over a 39-year time horizon, I would feel comfortable that the price of my house will go up, even if only because of inflation.
(But the price of a house can also go down or not appreciate. The 2008 housing crisis is an excellent reminder.)
That same house value was almost the same from when I sold it in 1984 until 1996. Fortunately, I made a profit of nearly 25% in the last two years I owned the house.
From 1984 until it sold again in 1999, it increased at an annual rate of 3.36%. It was barely keeping up with inflation. Suppose you take out the repairs to the house that occurred, new roof, foundation, new fence, and painting. That drops to 2.6%.
However, for many, a house is the best investment they ever make.
The single most important financial innovation of the last 100 years is the 30-year fixed-rate mortgage which has now morphed into a 15-year mortgage.
Most people are terrible at saving. And the 30-year fixed-rate mortgage is a forced savings program. My choice of the 15-year mortgage is savings on steroids.
With each monthly payment, you pay down a little bit of the principal. And over time, you build equity. It happens slowly at first and then picks up speed. Before long, you own 30, 40, or 50% of your house.
If you make prepayments, you dramatically shorten the length of the mortgage. It doesn’t take much; just $100 per month can remove several years from the life of the mortgage.
Not everyone should buy a home.
Why rent, you ask? Several simple reasons are:
You don’t have a cushion if things go wrong.
Your credit is not good – FIX IT FIRST
The rental payments are lower than a mortgage payment on an after-tax basis (including property taxes and insurance) for a comparable home.
You think houses are overpriced.
But what about the perceived quilt where you believe that people think you’re not a responsible adult if you rent.
Your choice is to be a responsible adult by living within your means and building your wealth.
Look at it this way:
In 90% of cases, renting is cheaper.
People do the math, and they say: “Here I am renting this apartment for $3,000 a month when I could buy a house and pay $2,800 a month in mortgage costs. No-brainer, right? The house is cheaper!”
Right now, you are paying the rent and utilities. If something breaks, the landlord takes care of it.
Roof leak, plumbing issues, termites, or pipes burst – Call the LANDLORD
When you buy a home, there’s no landlord to call. You are covering ALL of that on your own.
The decision starts with a plan. Do you know your financial numbers and how homeownership will impact you?
Yes- Congrats and make the intelligent decision to take a 15-year mortgage.
No – Time to make an appointment with Tannery Company and let us work with you to build a financial plan for today, tomorrow, and the future you desire.
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Michael Tannery CPA CDFA® AIF® ● CEO
Registered Principal | Tannery & Company
Be A Financial Olympian™
The opinions expressed in this material are for general informational purposes only and is not a substitute for professional advice. Individual circumstances do vary.