With the demise of the real estate market across the country, the big question is being asked: does it make financial sense to be a homeowner? Some financial experts say “maybe, maybe not.” When I was a guest on KGAL Real Estate Radio Talk last year, I said then that a home buyer really needs to plan to be in a house 5 years, but I would prefer 7-10 to minimize the financial risk to them in this market. The rent vs. buy debate has been fierce in real estate with the “It’s a good time to buy” pundits on one side and the “buying is a bad idea” pundits on the other side. Like most things, the answer lies in the middle for most people.
Someone recently shared this calculator with me that helps you, a home buyer, determine if it is “safe” to buy a house or if renting is better, strictly from a financial perspective. This doesn’t include the intangibles of homeownership in the calculator. I thought the calculator was intriguing (not perfect) and worth sharing with you. The calculator was “poo-pooed” on a forum by real estate agents, but I think it is interesting and could be helpful to a consumer. Why? Because it forces home buyers to focus on the numbers of homeownership. That’s not a bad thing, in my opinion, because I am a lover of all things data. I wouldn’t get stuck on the “real worth” number created by the program, but the concept is sound.
I entered one of my upcoming listings into the calculator. It spit out the potential rent at $960, which is fairly close to reality. The program allowed me to adjust the rental income easily and re-crunched the data. Real rent would probably go for $1000-$1100 at the most. The home will be listed at $140,000 and what did the calculator say? It was essentially a break-even proposition after 7 years for someone considering buying it or renting a similar property. For this particular scenario, the calculator was pretty accurate. I also did it for my own personal residence and found it to be fairly accurate if I was to buy my home at current market value.
What I really like about this calculator is that it forces home buyers to look at maintenance costs, property taxes, declining home values in this market, and yes tax deductions. I’m always amazed at people that think that if they buy a house for $160,000 and sell it two years later for $170,000 that they “made a profit” on the house. In reality they didn’t due to interest paid and the costs of selling a home. I’m constantly telling first time home buyers to budget 1% of the purchase price for maintenance and repairs of the home. Sometimes I get a dumbfounded look when I talk about how much a new furnace costs or a new roof. That money NEEDS to be banked and ready to go for when those eventual repairs come up. One of the biggest mistakes homebuyers make is pushing their finances so far that they can’t maintain their properties.
I don’t want to say that there are “hidden” costs to homeownership, but there are financial ramifications. I’ve owned three homes and could never see myself as a renter again. As I write this post, I’m waiting for the spackle to dry in a bathroom as I get ready to paint it a dark slateish purple color. A landlord isn’t going to be happy with that color, but my daughter really is. While being able to do what you want with your home has incredible emotional appeal, it also comes with fiscal responsibility. I’ve written before that the house we currently live in was fairly neglected and needed a lot of work. Every year is a project and we are still getting this home up to speed. Two years ago when we painted the exterior (probably the first time in 20 years), the neighbor across the street came over and said “I finally get to look at a pretty house.” When you fail to care for your home, it impacts the neighborhood and not just you.
So, where is all my rambling leading beside forcing you to reach for some strong scotch to get you through the rest of this? Get educated. Think about it. Plan for it. Whether or not renting or owning is the right choice for you is strictly a personal one that should have some basis in data. Learn about the financial implications of home ownership and if what you see works for you.