Home ownership has always been a cornerstone of the “American Dream.” While it is certainly an accomplishment worth striving to achieve, it may not always be the best or most appropriate financial choice to make in every circumstance. In fact, purchasing a home at the wrong time or in the wrong market can lead to serious financial strains including investment losses, foreclosure or even bankruptcy.
As a result, home ownership had been steadily declining in the U.S but recently has increased. According to recent Census Bureau numbers, the percentage of Americans who own a home is now 65.8 percent. Additionally, home ownership for Americans 35 and younger is now 38.3 percent. From individual financial circumstances to rents, property values and interest rates, there are many factors to consider before making one of the most significant financial commitments in your life.
The first thing to do when trying to decide between renting and buying is to take a closer look at your current financial position. Consider taking the time to thoroughly examine your finances including credit reports, cash reserves, cash flow and long-term financial goals. How will purchasing a home affect your ability to save for other goals such as retirement or education funding for children? How long do you plan to stay in the home you are considering purchasing? Do you expect to be relocated for work or do you anticipate outgrowing your home due to a growing family?
Generally, the longer you plan on staying in one place the better home ownership may begin to look when compared to renting. A longer holding period also gives you time to recoup fluctuations or volatility in the value of real estate. Real estate prices do decline and for the first time we are beginning to see a transition from the sellers’ market it has been. When purchasing near a peak in home values, it is important for buyers to have sufficient time to deal with price volatility.
Crunching the numbers
After examining your personal finances and long-term plans, the next variables to review involve the property itself. What are your total costs of ownership when compared to renting? Consider reviewing rental prices in the area, rental insurance premiums and annual rental increases as compared to the purchase price, interest rates, closing costs, potential real estate appreciate rates, real estate taxes, association fees and insurance costs. While there is a lot to consider, online calculators can help. Consider visiting www.bankrate.com for a handy calculator.
It also is extremely helpful to be able to compare renting versus buying based upon geographic region. While this has been quite difficult to do in the past, new tools have made this easier.
Consider using www.realtor.com’s interactive Rent vs Buy tool to help determine whether you should purchase or rent. According to Realtor.com, certain locations will prove to be more ideal for either renting or buying and with home affordability more challenging than ever, it is critical to examine this dynamic. The rent versus buy decision can be critical for investors as they attempt to identify real estate markets where the ratios look most promising. In addition to cash flow, it also is important to consider future appreciation.
But be careful. It can be difficult to predict how much real estate may appreciate, especially after the increase in values we have seen, so be conservative with any growth assumptions. You may also want to review scenarios where values may drop. Remember, the numbers should work without relying on significant increases in the value of real estate.
The rent versus buy decision can be quite complex for many savers. There is no question that under the right circumstances, home ownership can be significantly more advantageous than renting. However, personal circumstances and the relationship between home values/rents should be considered before jumping in and automatically assuming that buying is way to go.
Since everyone’s situation is unique, consider speaking to your financial, tax and legal advisers to determine the best approach for you.
Kurt J. Rossi, MBA, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNER & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.