If you currently rent, I’m willing to bet that at least one friend or family member has said something like this to you in the past year:
“You should buy a place. It’s a good investment.”
“You can always sell it or rent it out if you need to move.”
“Renting is throwing money away.”
Now, there are many good reasons to buy a home, but the above phrases don’t make the list because they aren’t necessarily true. If you’ve been reading my blog for awhile, you know I’m a fan of making big financial choices that work best for your goals, values, and cash flow. No one else’s agenda should come into play here!
Myth #1: A Home Is a Good Investment
Let’s say you bought a house 10 years ago for $250,000, and sell it today for $350,000. You made $100,000 in profit, right?
Not exactly. For one thing, you need to take inflation into account. $250,000 in 2006 is worth around $300,000 in today’s dollars, so there goes half of that $100,000. And don’t forget that maintaining the home costs around 1% of its value per year — let’s say around $3,000 for home repairs, yard work, cleaning, etc. Even more if you fully renovated any part of the house, replaced the roof, redid the landscaping, or any other major upgrades.
That leaves you with about $20,000 in profit. When you sell the house, you pay the real estate agent’s commission (5-6% of what you sell the home for), along with a few other costs. The cost of selling will easily wipe out that remaining money.
It is possible to sell a home at a profit, but it’s not a guarantee. More often than not, you’re lucky to break even. If money is your sole motivator, you’d be better off focusing on other kinds of investments, where your money has a better chance of beating inflation over the long run.
Myth #2: You Can Always Sell or Rent it Out
Your current home might not meet your needs forever. What if you want to relocate? What if there isn’t enough space for kids or a dog? What if the neighborhood takes a turn for the worse and you want to move somewhere where you feel safer?
“Easy!” your friends say. “You can always sell it, or just rent it out!”
Yes, you can try to do those things. But neither are as easy as you might think. As I mentioned before, selling your home comes with quite a few up-front costs, added to the fact that you might not make a profit. If you’re not living in an in-demand area, or there are many other comparable properties for sale nearby, your home may sit on the market for awhile.
And if you tried selling a home in 2009, you know how difficult a down market can be. Many people ended up underwater on their mortgages, stuck in homes they imagined they’d be able to sell for a tidy sum.
As for turning your home into a rental property, that can be a great way to earn a passive income. But keep a few things in mind before you go down that route:
- Does your condo association, co-op board, or HOA allow you to rent your home? Will they need to approve of potential tenants?
- What are rental rates like for similar properties in your area? Will the realistic rental price cover the cost of the mortgage and maintenance?
- Are you skilled enough to manage the property yourself, or will you hire a property management company?
- How difficult would evicting a problem tenant be? What will it cost you in terms of legal fees, lost rental income, and even cleaning up a trashed property? These things do happen!
- If your home sits on the rental market for a few months with no takers, are you able to cover the cost of two mortgages?
Selling your home isn’t easy, and neither is being a landlord. Don’t go into either situation without some research and careful consideration.
Myth #3: Renting is a Waste of Money
In theory, by paying a mortgage instead of rent, your money is going into something that will have value for you in the future. Hopefully by now you understand that that isn’t necessarily true! Buying involves lots of up-front costs that can run you tens (or hundreds!) of thousands of dollars. You’re tying up your money for years.
The low up-front and ongoing costs of renting allow you to invest your money elsewhere. You also have the flexibility to move with one or two month’s notice, which is something many people need when they’re young and still establishing their careers.
Renting is not the same as tossing cash into a bonfire. You’re getting something for that money — a roof over your head, and other people to handle maintenance and repairs. Renting a home could be exactly what you need at this (and maybe at every) stage in your life.
So if you’re planning on buying a home, don’t think of it as an investment. Think of it as a place to live, make memories, and make your mark. Before you buy, work with a financial planner to figure out how home ownership affects your overall cash flow, and establish what a realistic budget could be for you.