IT DEPENDS! Due to the costs and responsibilities involved with buying and holding real estate, there are many factors that need to be taken into account and the answer will depend on the person and where he/she is at any point in his/her life.
Historically, real estate has gone up in value. In theory, the longer you own real estate, the greater the odds your property will appreciate regardless of what the market is doing at any point in time. We’ve had 60+ year old clients buy their first home through us. Over those last four decades of renting, they’ve paid off one or two mortgages for their landlords and, without equity, are buying in the same price range as their 20-30 year old counterparts (all other things being equal).
The first question you should ask yourself is “How long am I willing to own this piece of property?”
If the answer is less than three or four years, renting is likely to be the best option. Due to the costs of buying and selling (2%-3.5% on the purchase and 7.4%-8% on the sale) it will likely take several years to make it worth buying…based on a 3% annual increase in property value. Between 2000 and 2005, we were seeing 20% appreciation compounded annually. Between 2006 and 2010, most areas saw declines (some very steep declines) in property values. Those ten years represent a very unusual period of history in regards to property values.
Question 2: “What is the likely rate of appreciation during the time you’ll own the property?”
Check with a knowledgeable Realtor on where the market is going based on current trends, lenders policies, future inventory etc. We can provide a wealth of information on this topic.
Question 3: “Am I comfortable fixing (or hiring a contractor to fix) problems that may arise as a homeowner and do I have the funds?”
If you have the will and funds to address home repairs, you’ll be in control of the quality of the repair rather than entrusting the choice to a landlord. Some landlords select inferior materials, which as a renter, you would be stuck using throughout the duration of your lease. A home inspection, which is typically done before purchasing a home, can tell you what types of repairs you’ll likely face in the next 1-10 years.
Question 4: “Am I okay paying off someone else’s mortgage?”
It’s a silly, but fair question. Many tenants take issue with the feeling that they’re throwing their money away each month. All they have to show for their rent is the place they’ve lived for that month. We understand this feeling. Many on our team starting out renting and were happy when they purchased their first homes and started to build their own equity.
Question 5: “Are you comfortable HAVING a landlord?”
Most people don’t like moving. Having a landlord means the possibility that at the end of your lease (usually one-two years) you may be told you need to find a new home. You may be told the rent is going up. You may be told that your heat will not be fixed for another week until the landlord saves some more money to fix the furnace (In 1999, Jim Roy learned that shampoo freezes when this happened in his six month rental).
Question 6: “Are you comfortable BEING a landlord?”
If the home you’ve bought is under water and you need to rent it out rather than sell, can you handle having a tenant? If done right, it’s very easy. The bad experiences we’ve heard from other landlords have many things in common including: poor planning for repair issues, poor decision making when issues arise and poor selection of a tenant.
Question 7: “Do I have the down payment, cash reserves, income and credit score to make purchasing a home a reality?”
If no, you’re not alone. Many people are planning and saving to put themselves in a position to buy. They’re working with a lender to fix any credit issues so as to get the best interest rates. However, if you’re currently ready and nothing else is holding you back, there’s no need to wait. Some buyers wait too long thinking they need more in reserves and miss out on the right house, price or interest rates. In general, we advise two-three months of savings, 3.5%-10% down and a credit score above 620 although we’ve helped people buy with no money down, less savings and lower credit scores as they were ready for other reasons.
Question 8: “Do you think interest rates will increase in the near future?”
A 1% increase in interest rates can result in a huge increase in monthly payments, bringing certain properties out of your price range. If you buy and interest rates go down, however, you are likely to be able to refinance and take advantage of lower payments. Note: this will be impacted by several factors including the value of your home, lenders’ guidelines (which are always changing), etc.