Eat Cake

Buy, or Rent?

Buying a home is often the single largest investment decision anyone makes in
life. It’s probably also the single most emotional decision after the choice of
a partner / spouse. Not surprising therefore, that the question of whether to
buy or rent a home evokes significant controversy.

Rich Dad followers swear by Kiyosaki’s advice - A home is a liability. 
David Bach considers mortgage to be good debt. "You buy a home, it will be
the best investment you will make in your life."  Who’s right?

"We pay $1,000 towards rent every month. We’ve looked for a home, but
the monthly instalment is not less than $1,800 a month. We can’t afford
that."  Or maybe they can. And sign up for mortgage payments that
drain the pocket.

Disclaimer :

I am not a financial advisor. I am not responsible for any decisions you make
after reading this. Please consult your financial advisor before making any
financial commitments.

Buy. And Rent!

Some assumptions upfront, to make it clear what I’m talking about.

• If you’re in town for a short time, and plan to move to another city in
  the near future, rent. That’s a no-brainer.
• If you plan to live in the same area for the next umpteen years, buying
  trumps renting. Usually.
• If you’ve got enough money to buy outright and not feel the pinch, you
  have the answer to the "Buy or Rent" question.
• If you qualify for a mortgage and can make a reasonable installment payment, then you’ve probably pondered the question. What follows is my take
  on this; it may or may not be relevant to you.
• Most rentals tend to rent out for a monthly rental that would be
  comparable to the PITM (Principal, Interest, Taxes and Maintenance) payments
  on a mortgage purchase. That’s because the person renting out the place has
  other investment options. And if he’s not making enough to cover his costs,
  he’s likely to sell out. Comparable here means that the amount isn’t too
  different - it might be slightly more or less.

Two definitions here.

• When I say rent, I’m talking about the home you live in.
  You’re the tenant.
• When I say lease, I’m talking about a home you may own and
  lease out. You’re the landlord.

Quite often, the home you plan to buy does not have the same value or rental
as the home you rent. A young couple, newly married might live in a studio
apartment but plan for a 3 or 4 bedroom house. A single person with plans to
marry would look to buy a home quite different from where he or she currently
lives. Or, if money is tight, living with parents, or in a subsidized rental
home isn’t unusual, while looking out for a reasonable buy.

A common mistake is to compare the home you buy against the home you rent.
That’s where the Buy or Rent issue comes up. And that’s where it’s apples versus
oranges. Realistically, you should compare like to like. You’d want to buy the
home that’s the best one possible. Whatever the best is, for you. You’d rent the
home that’s manageable. Whatever that is. Are the two the same? If they aren’t,
that’s where the buy or rent question arises. Especially if the monthly mortgage
installment’s a lot higher than your monthly rental expense.

Turn this around now.

• You continue to rent the place you live in. Makes financial sense.
• You buy a home you like, where you can qualify for the mortgage. And are
  able to lease out for a monthly payment that covers the PITM.
• Or maybe, you top up the payment a little - $100 or more, whatever you’re
  comfortable with. Which helps you buy a better home.

Make sense?

• You’ve bought a home now, locking in good price and terms. Over the years,
  both capital value and lease income may increase. Even if that isn’t
  significant, you’re still accumulating equity.
• The installments are substantially or wholly  paid out of the lease
  income. So you aren’t feeling maxed out.
• Your rental payments are the same. So your expense profile hasn’t changed.
• You may have some tax benefits from owning and leasing. Check that out.
• Over a few years, your income may grow. Along with your needs. Today, you
  don’t need a larger home. When you do, you just stop renting. And leasing.
• Or your needs and views may change. In which case, you continue being a
  property owner. Or flip it over. As you wish.

Chances are, a responsible lease plan with an existing tenant might qualify
you for a better loan and terms, even today. Lenders are comfortable with a
lease assumption that doesn’t solely depend on your income - it’s considered
less risk.

And you get brownie points on your credit report, for being a home owner.

Brownies are cake too. Aren’t they?

This article was inspired by High-Tech Vacillation.

If you find this interesting, we’d love to hear your views. Email us at GMail.
The nick is 2cworth.