Rent or buy?
Am I buying at the peak, should I wait and rent for a year??
This question is ALWAYS here, but the answer varies. Depending on your situation and on both the state of the rental and sales markets, your decision to rent or buy can make a huge difference in your financial future and your well-being.
Right now the affordability is at an historic low, rates are going up, the stock market is crashing and as a buyer you have to wonder if you are buying at the peak. Let’s break down what goes into the answer to the one of the most common questions I hear everyday: “should I buy or rent?”
WHEN TO RENT
“I don’t know where to buy!”
The only real good reason to rent in my opinion is if you are uncertain about the location of your future home. Location location location. The ultimate rule in real estate is to put your money towards the location, and it’s true in any market including ours, in the Roaring Fork Valley. If you don’t have a clear understanding of where you want to live, and where value is, you should rent before you buy. Buying and selling come at a high cost and you want to make sure you don’t have to sell quickly because you realized that you don’t like the location of your home.
The location dictates the outlook on value (buy the worst house of the best neighborhood!) but also of you lifestyle in our valley. Are you all about skiing? Buy less of a house if needed, but closer to Aspen and Snowmass or Sunglight Ski Resort. You work from home and would pick mountain bike over eating and sleeping any day? New Castle might be for you. You don’t know where you favorite place in the valley is, the one that will put a smile on your face everyday? RENT!
Can’t afford to buy
First of all, make sure this is an accurate statement!
Reach out to your lender and talk to them about your financial situation. The local and national governments have several assistance programs to help borrow money at a lower rate and access property with little to no downpayment.
After talking to them, it’s likely that your new statement will change from “I can’t afford to buy” to “This is what I can qualify for”. From there, you might think that there is nothing you like in your price range. You can then either rent or buy a piece of property that isn’t exactly the dream, but that you can use as a stepping stone. At some point it will be worth more than what you paid for it and you can use the equity to buy the house you really want. Make sure you are willing to spend 5 to 10 years in whatever property you buy so you can weather a potential downturn in the market.
If you rent you can move quicker than that, but it’s likely that your dream home won’t be affordable to you in a year or two if it isn’t now… It’s always better to find a way to make it work and own property rather than rent. Your chances to find yourself in a better financial position in a few years are greater if owning a home. Especially during periods of inflation. It’s easier to find yourself with $100,000 of equity in a property than to save $100,000 no matter how hard you work. The reason is simple: equity doesn’t get taxed, your income does. When you own you put real estate on your side. When you rent you are fighting the tide.
NOT WHEN, BUT HOW TO BUY
I know, the market is hot, and you think you should wait for because there will be some deals in a year or two… Let’s make a test: if you agree with this sentence and stick to it, let’s have you read it again in a year, in 2 years, in 5 years… Chances are that you’ll feel that way at any time! In the meantime the market will go up, your landlord will increase your rent on you and your friends who bought a home will seem to be having it quite easier than you. The market reacts in unpredictable ways and you don’t want to leave such an important decision to luck or gut feel. For example in 2022 so far rates have been going up along with prices! It’s very counterintuitive and some buyer passed on opportunities they could have taken because they decided to wait.
You are not alone, it’s always more comfortable to wait than to commit to owning a piece of real estate and the debt that comes with it. Waiting for a crash is a comfortable path that leads nowhere. Buying real estate is a uphill mountain rocky road and it will get you to a nice point of view!
It’s especially scary to buy in today’s market. We are not he tail end of massive appreciation, the curve really makes it look like we are “at the peak”. We all still have nightmares about 2008 and nobody wants to be the guy buying at the peak.
There is something else that keeps going up today though: RENTS! When you buy an $800,000 house you are not spending $800,000. You are committing to spend the interest portion of your monthly payment every month for as long as you own the house. The principal and the downpayment goes to your equity so you will get that back and then some. When you sign a year lease at $3,500 a month you are effectively giving $42,000 to your landlord. That’s a loss, not a risk! To lose $42,000 on a $800,000 home in a year, it takes a 5% dip in value. In this recent video by the Wall Street Journal, they recommend renting over buying if the rent is less than the monthly mortgage payment would be. As I explained above I don’t think its that simple because you rent is always a loss on your financial statement. I’d argue that if your monthly payment is less than 120% of what the rent would be, you’d be better off buying than renting over time.
It’s not about when you buy, it’s about how you buy.
There are some golden rules that should be followed in order to keep your finances safe when buying a home, in any market. The goal of following these rules is to make sure TIME IS ON YOUR SIDE! From there the market will do what the market does. It doesn’t matter what your house is worth if you don’t have to sell it.
Time has to be on your side rule number 1: be comfortable with you monthly payment, keep it at 30% of your household income of less.
Time has to be on your side rule number 2: Don't spend to your last dollar on your house! Keep 4 to 6 months of monthly payments on a savings account.
Time has to be on your side rule number 3: Find a home that you know you can live in for 5 to 10 years.
Finally, make sure that the home you buy has some elements of value. Elements of value are things that make a property more valuable and that are not replicable. For example, granite countertop make a house more valuable but they are replicable so you can’t count them as elements of value. A view, river front, acreage, location are amongst other things elements of value.
Main takeaways:
Timing the market is impossible, and most of the people who try end up sitting on the sideline and falling behind financially over time.
Fear always kicks in when you are in a position to buy a property, but there are ways to protect yourself against a downturn and move forward carefully and safely.
Wether you buy in a hot or a cold market, make sure time is on your side and your real estate will always win on the long run! Never put yourself in a position that you have to sell.
Renting is a losing proposition financially, but if you aren’t sure about the location you should accept to take the hit and rent until you know where you want to live.
