Joseph Heneghan No Comments

When it comes to renting vs. buying a home, there are two parts to the analysis: 1) lifestyle and personal priorities, and 2) long-term financial planning. But the decision also involves timing, because many people are better off owning a home later in life when they’re more likely to be settled. 

After all, the fees and taxes associated with buying a home (above the cost of the home itself) generally add up to 2% to 5% of the home’s price, which amounts to thousands of dollars. In addition, it takes a lot of time and effort to find a home and move into it. 

Your Biggest Investment?

First, let’s tackle the long-term perspective on the potential benefits of owning a home. Another commonly heard phrase when you’re thinking of buying a personal residence is, “Your home is your biggest investment.” A better way to think of it is: owning your home is your second biggest savings plan, with some investment features. 

Here’s why: Your biggest savings goal should be funding your retirement. Unless you receive a substantial inheritance or are covered by a generous pension plan, you’ll need to have more in your retirement savings portfolio by the time you retire than the value of a typical home. 

Imagine you’re 65 and want to retire. According to Zillow (a real estate data servicing firm), the median home value in the U.S. is $216,000. Of course, that includes many homes in areas you might find undesirable, so it may be safer to round up that figure to $300,000.

What kind of sustainable annual contribution to your retirement income would $300,000 make? Possibly around $9,000. Would that amount plus Social Security be enough for you to live on? Probably not. You might need at least twice that, meaning that your retirement savings fund will have to be a much larger investment than your home. 

Unless you own more than one home, some real estate insiders say it’s inaccurate to think of your home as an investment at all, because retired or working, you still need a place to live. If you were to net $300,000 from selling your home, much of the $9,000 in annual income it could generate would go toward rent, so there’s no windfall in selling your house when you retire.

Staying Put

Suppose you decide to keep your own home instead of selling. You’ll still have housing expenses — including property taxes, upkeep and utilities. But these costs will add up to less than what you’d pay in rent, unless you radically downsize. Keep in mind, landlords are in business to make money. They need to cover not only the mortgage payment, but all the associated costs of buying and maintaining a home before they see a dime of profit.

Finally, people who refer to buying a home as an investment point to the historic pattern of price appreciation of homes. That’s a fair reason to own, but don’t forget, home prices can go down as well as up.

Advantages of Youth

If owning a home is a good idea in the long run, what’s the best timing?

In general, the younger you are, the more flexible you can be in postponing a home purchase. And as a practical matter, if you don’t have much money saved for a down payment and are early in your career, you might be unable to buy a home anyway.

On the other hand, if housing prices where you aspire to live are rising rapidly, you’ll need to think about it more closely. The biggest decision may be how you’ll come up with a down payment.

If it appears your real estate market is in a bubble that’s about to burst, hold off. Unfortunately, it’s hard to recognize a bubble until it pops. If instead, sober analysts believe your real estate market will be on a steady upswing, and you expect to continue living there for a long time, buying sooner could be the right move.

You might need some professional guidance from a financial advisor to conduct a proper analysis. Factors in play include:

  • The after-tax cost of financing a home purchase (the Tax Cuts and Jobs Act of 2017 changes the tax equation on home ownership for many people)
  • Your trajectory toward achieving your retirement and other savings goals
  • Realistic expectations of future changes in your earnings
  • Other financial obligations, such as the education of your children
  • The pros and cons of various kinds of home mortgages..

Before You Take the Leap

Carefully thinking through the rent vs. buy decision is certainly harder than following a friend’s advice or an apparent truism. But you’ll probably sleep better at night knowing you’ve made an informed decision rather than rolling the dice on such an important financial decision.