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When Renting Can Be a Right Decision

17 Jan 2017

Posted by Joseph Coupal

House for RentConventional wisdom suggests buying a home makes more financial sense than renting. In many cases, this is true. However, renting is sometimes a smarter approach than buying.

As with any financial decision, all of the options and circumstances need to be weighed before jumping in. Making a major purchase requires doing some homework. The following are some reasons why renting can be more beneficial than buying.

Youth

The typical first-time home buyer is 31-years-old. People who are younger than that and uncertain about their futures should not feel pressured into buying simply because it is presumed to be the “adult” thing to do. Renting and feeling your financial way, which can include seeing how a job pans out or where one’s budget lies after paying off debts, might make more financial sense than buying.

High price-to-rent ratio

Buying may seem like a wise idea, but it could be causing people to spend more than necessary, particularly if they check the price-to-rent ratio and find homes in their area are not fairly priced.

Figuring a P/R ratio includes finding two similar houses (or condos or apartments) where one is for sale and the other is for rent. Divide the sale price of the first place by the annual rent for the second. The end result is the P/R ratio.

The higher the P/R ratio, the more sense it makes to rent instead of buy.

Home prices continue to rise

Some people find themselves being priced out of certain neighborhoods or cities. While the typical worker’s earnings increased a meager 0.3 percent during the study period, median house prices were up by 17 percent. Wages have not recovered from the Great Recession as quickly as home prices have, and some people may need to rent out of necessity.

A market shortage makes it harder to find an affordable home. The number of homes available for sale in many areas of the country has fallen below the number that is required for the market to be in balance. Therefore, even when a home becomes available, demand drives the price up to where it may not be affordable or fiscally smart to purchase. In such instances, renting may be the best option.

One doesn’t meet the buying criteria

Individuals should not buy a home based on market conditions or pressure from others. Instead, they should buy when they’re financially ready. This means being out of debt; having between three and six months of expenses in an emergency fund; enough cash for a 10 to 20 percent down payment on a fixed mortgage; and when their mortgage payment will be no more than 25 percent of their monthly take-home pay.

Renting can be a smart move in many instances. Only when individuals are financially and emotionally ready to buy should they begin searching for their first homes.

For more information on apartments, contact HHHunt.

#HowYouLive
villagenews.com

Are You Ready To Buy a Home?

24 Feb 2014

Posted by Joseph Coupal

All over the country, homes are selling like crazy. They’re being snatched up as soon as they go on the market, and homebuyers are willing to pay more to get the home they want. In fact, you can probably name several friends who are looking to buy a home in the next few months.

Conditions in the housing market have changed so quickly that it’s easy to get caught up in the frenzy and catch house fever yourself. But before you hop on that bandwagon, think through these three reasons why now may not be the time to buy a home.

1. You’re in Debt

If you have any debt, your focus right now is to pay it off. Current statistics show the average American household has more than $15,000 in credit card debt, shells out 8–11% of their income for car payments, and owes more than $32,000 in student loans. Add the average monthly mortgage payment of more than $1,000, and you’ve got a recipe for bankruptcy. If you want to buy a home and have peace of mind, pay off your debt before you take the next step toward homeownership.

2. You’re Not Prepared for the Unexpected

Following the Baby Steps, once you’re out of debt, it’s time to build your emergency fund of three to six months of expenses. Now you’ll have the cash to take care of unplanned expenses (like a storm-damaged roof) or pay the bills, including your mortgage payment, if you lose your job. It’s one extra bit of insurance against Murphy—the idea that whatever can go wrong will go wrong.

3. You Don’t Have a Big Enough Down Payment

While Dave prefers you use the 100%-down plan and pay cash for a home, a conservative 15-year mortgage with a payment that’s no more than 25% of your take-home pay is also an acceptable option. You should pay at least 10% down, but 20% is even better. With a 20% down payment, you’ll avoid private mortgage insurance costs, which can add $1,800 a year to the payments on a $200,000 mortgage. You can start socking away money for your down payment after you’ve built your emergency fund.

You can see how dealing with any of these three issues would make homeownership a struggle. If your goal is to buy a home, make it a priority to overcome these obstacles and you’ll be on your way to owning your home the right way.

daveramsey.com

Think Before You Buy a House

06 Jan 2014

Posted by Joseph Coupal

It is considered a known fact that home ownership is a part of the American dream. But don't for one second think that home ownership is all sunshine, rainbows, and ice cream sandwiches. There are serious trade-offs that you should know, understand, and accept before signing on the dotted line.

1. Mortgage debt -- a marriage you can't divorce

According to the Census Bureau, the average home price in 2010 was $272,900. A traditional mortgage will finance 80% of that, or just over $218,000. The Census Bureau also reported that median household income in the U.S. was just over $51,000.

Are you comfortable owing over four times your total gross income (before taxes)?

You may be thinking, "But if I don't buy a house, I'm throwing away my money to a landlord with rent!"

Would you rather be "throwing away" your money to a landlord, or to a bank? Because if you bought that $272,000 average American house with a $218,000 loan at 5% for 30 years, you'd pay over $52,000 in interest to your bank of choice over the first five years alone!

Before the house was paid in full, you will have paid that bank over $203,000 dollars -- in interest alone!

2. When you own the house, you pay for the maintenance and repairs

Landlords get a bad rap. A respectable, professional landlord can make life orders of magnitude easier. They are your on-call repairman, plumber, hardware store, and lawn maintenance company.

Air conditioner compressor breaks on the hottest summer day? Landlord will take care of it. Snow storm knocks a large branch into the yard? Landlord will take care of it. Bathroom drain cloggs? Landloard will take care of it.

Nothing like a surprise $5,000 expense (with interest) to ruin those summer barbecue plans.

3. How long did it take to save up that down payment?

In our "average American" example, our potential homebuyer would have to put down a payment of $54,000 to qualify for the traditional mortgage. After closing costs and miscellaneous expenses, let’s call this a round $60,000 just to purchase the home and get a loan approval.

That means that in truth, this buyer needs a decent bit more than $60,000, though. The bank will not make a loan for a borrower who is putting 100% of their liquid assets into the home. Banks like back-up plans, and without some cash cushion, there is no real back-up plan.

So now, our typical American, must save somewhere in the neighborhood of 150% of their annual income to comfortably afford the down payment.

It may make more sense to take that $60k to $75k savings and invest in a target date fund, or an index fund. Those investments are liquid, they can be rebalanced, they don't require property taxes, and their toilets won't overflow, forcing you to pay a plumber to come out on a holiday.

4. Buying a home is not an investment

This final point will be hard to swallow. Buying a home is not buying an investment. It's buying a highly leveraged forced-savings account.

According to data from Freddie Mac, the inflation adjusted return for an investment in a home bought in 1970 is just over 27% through the second quarter of this year. That's a 27% return over a 43-year holding period!

If buying a home isn't an investment, then what is it?

It's a forced savings account. Along with that healthy dose of interest that goes to the bank every month is also a sliver of principal pay-down. Over 10 to 20 years, those principal payments can add up to a good bit of equity. So for those individuals who have trouble putting money aside in savings every month, this is an attractive feature.

But the point is, don't buy a house thinking it is a panacea for financial woe. If you want to maximize your investments, look elsewhere. If you want real estate exposure, consider a REIT. Don't be fooled into thinking that buying a home is a one-way ticket to the good life.

If you are still sure you want to join the ranks of homeowners, go for it. Your decision is thoughtfully considered, you've done the research into the upsides and the downsides, and you're making your own decision.

Personal finance and managing money is as much or more art than it is science. There is never a single right answer that applies across the board. We must all consider the risks, the rewards, and our own personal situations, and then act thoughtfully.

Daily Finance

Renting a Home is Good for Job Security

19 Nov 2013

Posted by Joseph Coupal

Many nations encourage home ownership, and it is something that most young people still aspire to, but a new study has pointed out this might not be such a good thing. It has found that encouraging people to purchase homes could lead to higher unemployment levels in the future.

The research was carried out in the UK and at Dartmouth College in New Hampshire, and the study found that when the rates of homeownership increase in countries then unemployment can begin to rise a few years later. Settling down in a home that you own makes many people reluctant to move just for the sake of the job.

In addition researchers found that homeownership could lead to longer commutes to work, wasting money and time. Neighborhoods with high levels of homeownership are also more likely to be opposed to new businesses opening up locally, something that can stifle entrepreneurship.

Researchers based their study on data collected in developed nations including the US. The study does acknowledge that high levels of unemployment are connected to other factors, but in spite of this it feels there is a clear link with homeownership and that the effects can be considerable. According to the report in CNN Money.com, doubling the rate of homeownership in an area could lead to the unemployment rate doubling as well. Apparently this trend has been particularly apparent since the 1980s, and researchers in the study are calling for people to become less obsessed with homeownership. They feel it makes the labor market much less flexible, and over time could cause jobs to gradually disappear. As an example, researchers compared Spain and Switzerland, as both homeownership and unemployment rates are particularly high in Spain, while levels are particularly low in Switzerland.

It’s easy to think from the tone of the report that the authors are against homeownership, but apparently this isn’t the case. They point out that older workers often want to own their own home in preparation for retirement, and in this case it would have little effect on the employment rates. In countries such as Switzerland and Germany people tend to purchase homes towards the end of their working life, something the researchers feel is efficient. However when people are young it makes more sense for them to be mobile and rent a home.

Realty Biz News

Rent or Buy? More Choosing to Rent

05 Aug 2013

Posted by Joseph Coupal

Homeownership has always been held up as the American Dream. But it took a major hit during the Recession, slamming home values. As a result, despite a rebound in much of the country, even some affluent homeowners are weighing whether it makes sense to become permanent renters - and are asking planners for guidance.

Many former owners have already joined the ranks of renters. According to a March report from the Federal Reserve, 16 million Americans became homeowners between 2000 and 2006, while 700,000 became renters. However, in the five following years, 1.2 million left the ranks of homeowners, while 4.2 million new renters emerged.

The report also found that an apartment building boom followed. Remarkably, the report added, this happened "even with housing affordability near historic highs."

The fact that people flooded the rental market during a period when one might have expected a rise in ownership, due to a combination of depressed home prices and historically low interest rates, indicates that other factors are at play.

CHANGING THE MATH

Homeownership still makes sense for many affluent clients. Yet given the economic and political climate, "the prospect for increased taxes, decreased deductions and slow growth in housing is driving many people to consider the rental alternative.

While buying has many advantages,  homeownership requires a substantial down payment, typically 10% to 20% of a home's purchase price, and will generate an annual property tax bill as well as hefty annual maintenance costs - anywhere from 1% to 4% of a home's total value, according to HSH.com, a real estate publisher.

That changes the math for some. Because the cost of buying and selling a home can be close to 10% of its value, ownership makes sense only if a client plans to live there five to 10 years. You need enough time to ride out a market cycle if necessary to cover these costs.

Of course, it's not always possible to coordinate market cycles with the need to move - so there's no guarantee that homeowners who stay put will recoup their costs or do better financially than if they had rented.

GENERATIONAL SPLIT

Renting is more common among younger adults - 43% of people younger than 30 rent, compared with 22% of those 45 to 64, and 16% of those older than 65. But while young adults in the past might have stretched to become homeowners as soon as they were able, they are now more cautious.

Some consider renting to be a long-term lifestyle choice that gives them more mobility and freedom from maintenance chores. Having reached adulthood during the Recession, they saw home prices plunge and carry no illusions that appreciation is guaranteed.

Younger affluent clients tended to concentrate on the relative difference in net after-tax payment between buying and renting.  Now, many are more pessimistic, and are "factoring in either zero or negative short-term growth."

For clients 45 and older, the primary concerns may be different. At midlife and beyond, people often make the decision to buy or rent based on lifestyle preferences or health issues rather than financial concerns, particularly if they already have substantial assets.

For older clients in particular, renting may also offer estate-planning benefits. "Trustees and estate executors are alleviated from having to sell a property, which can require improvements in preparation for sale, selecting an agent, negotiations and differences in opinion among estate beneficiaries.” "Renting also alleviates a potential liquidity drain if the house doesn't quickly sell."

Excerpts – Financial Planning

Think Before you Buy

29 Jul 2013

Posted by Joseph Coupal

Have you heard this before: Renting is like throwing your money away. Buy a house now because home prices are rising. A house is the best investment you can make. Owning a home is the American dream.

Sound familiar? Like marriage and parenthood, buying a house means you can shed the label “recent college grad” and call yourself grown-up.

But a home is not necessarily the best investment you can make. And even if you can afford it, it may not make you happy.

Peel back the packaging on those reportedly low interest rates. Those are reserved for people with stratospheric credit scores, 20% for a down payment and minimal student loans.

Also, have you met the zombie homeowners? They still walk this land. Between the peak of the market in June 2007 and May 2013, loads of homes were foreclosed on.

The foreclosure crisis disproportionately affected young people and other groups. Plenty of college-educated, employed people whose mortgages fell underwater and, credit rating be damned, they opted to abandon their homes.

Home prices are rising now, and Zillow estimates they will go up 7% in the next 12 months. But from peak to trough, most homes lost a large percentage of their value.

Recent studies show that high rates of homeownership can actually dog a region’s economic growth. A May study showed that when a state doubles its homeownership rate, a doubling of unemployment later follows. An increase in homeownership led to lower levels of labor mobility, longer commute times and fewer new businesses.

If you plan to stay in a home for less than 7 years, it’s better to rent than buy.

“Many say you shouldn’t use a house as an investment. Investing in the stock market or some other vehicle is a better choice,” said Svenja Gudell, senior economist at Zillow.

Seattle Times

Rent or Buy Your Next Home?

10 Apr 2013

Posted by Joseph Coupal

Many people consider owning your own home the American dream, but no dream is one-size-fits-all.
 
While owning a home can increase your net worth, there are potential downsides as well -- additional labor, hassle and cost, to name a few. In many cases, renting an apartment makes sense.

How can you know which is best? Here's what you need to consider:
 
The minuses of homeownership: Owning a home is a huge time commitment. When you rent, maintenance is someone else's problem and repairs are solved with a phone call. When you own a home, you take on the rolls of maintenance and gardener. When something breaks, you need to fix it.
 
Homeownership also limits flexibility. When you buy, you should plan to keep the house at least five years, because transaction costs -- agent commissions and other sales expenses -- are high. Sell too soon and you won't recoup those costs.
 
The pluses: One of the joys of homeownership is investing time to make it yours and make it worth more. What you can do to customize a home you own is limited only by your imagination, budget and local zoning restrictions.
 
The bottom line: If you want to stay mobile, if you don't enjoy home improvement projects, rent. If you're staying put and watch a lot of HGTV, buy.

Money
The minuses: If you rent, you'll pay the first month's rent, a security deposit, and maybe a pet deposit. Buying means a down payment, closing costs, and other major expenses, not to mention the additional expense of repairs and maintenance when you own a home.

In 2010 the average annual homeowners’ insurance premium was $909. Property taxes vary widely depending on where you live, but run from hundreds a year to thousands.

The bottom line: If you don't have the money and/or credit score necessary to buy a home, the question is moot. But if you can afford to own a home in a desirable area with an expanding population, you'll probably be rewarded financially.
 
One way to run the numbers is to use buy vs. rent calculators. But, while those are certainly helpful, the answer you get from a calculator will depend on the information you provide -- some of which you can't possibly know.
 
For example, among other variables, most calculators will ask how much the house you're buying will appreciate annually, as well as how much equivalent rent will increase over time. These are questions you cannot answer.
 
Buying a home? Don't get in over your head, keep these thoughts in mind:

  • To lower the risk of homeownership, buy only what you need, not the most expensive house you qualify for. The average house in 1950 was less than 1,000 square feet. Today it's more than twice that. Remember that whatever you buy, you're going to have to furnish, heat, cool, insure, clean and maintain it.
  • If you have bad credit and only qualify for a high-interest mortgage, it will cost you tens of thousands of extra dollars over the life of your loan.
  • The more you put down, the less you borrow and the less risk you take.
  • Finally, if you decide it's time to buy, hope for appreciation, but don't count on it. However, if the community you're living in has both expanding employment opportunities and population, prices are likely to rise over time.  


MSN Money

Many are Not Ready for Homeownership

19 Oct 2012

Posted by Joseph Coupal

With housing prices still low many renters are feeling the pressure to finally buy their first homes. But making the transition from renting to owning is a big change, and not everyone is ready for it.

Here are some tips that will help you decide if you should rent or buy.

When Will You Break Even

Many believe that without rent, you can start building equity in your own property. But don’t expect that investment to start paying off right away. With a down payment, property taxes, insurance and your monthly mortgage payment, expect the five to ten years to put a bite on your finances.

So when does home ownership start to pay off? There are a number of factors at play here, but on average, you’re likely going to break even in 5 or 10 years. In markets with high housing prices, the break-even point can be pushed back to a decade or more.

Learning to Live With Less

Homes are an investment that could pay for itself in 5 to 10 years. However, between the property taxes and monthly mortgage payment, as well as home maintenance fees, the amount you spend on housing each month can rise dramatically, and it may cause a major lifestyle shift for new homeowners. Even with tax benefits that allow you to write off mortgage interest costs, the first several years are going to be lean -- a change that many new homeowners aren’t prepared for.

Before you make the leap, there are a few questions you should ask yourself. Are you planning on staying put for several years? Are you prepared to cut back on luxuries like vacations and eating out? Are you willing to take on the risk that housing values can decrease further?

Taking Care of the House

Making your monthly mortgage payment is only one part of the equation when it comes to owning your own place. Without a landlord to handle repairs, it’s now up to you to tackle the day-to-day maintenance issues that are sure to crop up. As a renter, you can solve most problems with a phone call, but as a homeowner, be prepared to give up a Saturday in order to clean the gutters, or to dip into your savings to hire a plumber.

Fox News

The Benefits of Home Equity are Overrated

11 Oct 2012

Posted by Joseph Coupal

If you’ve ever thought about buying a home, you’ve heard the song and dance on home equity plenty of times. While home ownership is a good financial decision for some, the benefits of home equity are frequently overrated by homeownership proponents.

The Housing Market Has Risks

For generations, home equity was considered the holy grail of wealth accumulation. In 2007, the median family held nearly $100,000 in home equity. Home equity was responsible for nearly three quarters of family wealth. However, that’s all in the past.

By 2010, the Recession ravaged median family wealth. Most families took their losses from only one of the many assets commonly held: home equity. Home equity plunged nearly 40% and was responsible for creating the lowest levels of middle class wealth in the last 10 years.

For decades, Americans assumed that home prices were a safe investment for their wealth, but the recent recession has disproven this assumption.

Home Equity is Just a Number on a Piece of Paper

There are two ways you can get value for your home equity. You can sell your home or you can leverage your equity for a loan. In both cases, the amount of money you get converting equity to cash is much less than the number you calculate on a piece of paper.

Selling your home comes with a number of selling costs: commission, plus legal fees and potential selling concessions.

Borrowing against your equity often comes with bank fees and will certainly carry interest costs.

Home equity looks nice when you subtract the selling price of your home from the principal you owe on your mortgage, but the real value of the equity is far less.

Converting Home Equity to Cash Takes Time - Realistically, cashing in on equity takes time, and that means lots of hidden costs. If you were to move out before selling your home, you’d be losing money with every property tax payment. Getting value for your equity is rarely hassle-free.

Home Equity Requires Maintenance - If you want your equity to hold value, you’ll need to update old fixtures and repair your home when things wear out or break. Many homeowners let their curb appeal slide or allow their interior to become outdated. Sellers are later shocked when prospective buyers are able to bid far lower than homeowners expect.

Your Equity is Sensitive to Your Neighbors - Is your neighbor’s house falling apart? How many homes on your street are in foreclosure? None of these questions may seem related to you, but they are related to the value of your home.

For information on Buying a home or renting an apartment visit HHHunt Rent vs Buy.

US News

Renting is Very Attractive for Many

14 Aug 2012

Posted by Joseph Coupal

Is there still an appetite among young people to own their own homes? A survey suggested otherwise.

It showed that almost a half of those people currently renting would be happy to rent long term.

But as more people are forced into renting over the long term, could we really be approaching a sea-change in our attitude to property ownership?

There are lots of attractions to renting, not least the fact that any problems with the property have to be fixed by the landlord, not the renter. With no sudden maintenance costs to meet, renting can actually be a good long-term deal.

It's also worth bearing in mind that renters don't have to pay property taxes. Renters also avoid all the other costs that home buyers have to meet.

If you're renting, you have more flexibility in terms of moving. That fact resonates with all those people sitting with negative equity on their property.

The fact that they owe more than the property is worth means very few will be able to take the loss if they want to move. In other words, they're trapped.

The world has changed. The housing market has not risen since the crash in 2008 and as of yet is not climbing.  

Presently, the traditional view of the home being your most valuable asset doesn't apply.

Rather than risking your savings on a massive deposit and the associated property purchase costs, choosing to rent as a long-term decision could actually make sense.

Many renters, rather than viewing renting as a period between purchases, now see it as a better-value alternative to short-term ownership. Renting can help avoid making costly mistakes.

Long term, most believe that the property market will recover somewhat. But it may never reach the historic levels which turned generations of homeowners into speculators. In other words, the profits we've become used to may have simply gone.

Once you strip out the idea of a home being a financial investment, then you focus on finding the best home. And that could just as easily be a rented one.

For information on buying a home or renting an apartment visit HHHunt Rent vs Buy.
 
The Independent


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