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Here’s a question from Rick:
How do I really decide if it is a better to own versus just continuing to rent? I want to own, but I am worried about further price declines.
Rent vs. Own is a great topic to discuss. Price declines are a separate issue, so let’s tackle rent vs. own first. There are lots of issues in making this decision to buy or keep renting – a few important guidelines:
1. If you are not planning to own the property for at least four-plus years, it probably makes sense to stay a renter. No need to deal with all the risk, hassles and costs of being the owner (and the high cost of sale) for a short period of time.
2. Buying a starter home to “move up” is not necessarily a good idea either unless you plan on living there many years or keeping the starter home as a rental. There are significant costs each time one sells a home — from sales commissions to escrow fees, repairs and financing costs. The appreciation in value in a few years is probably not going to be more than all those costs — so don’t buy if you plan on moving “up” in a few years. Save your money until you can afford the “right” home for a longer term.
For example, in La Mesa or east San Diego, I can rent a nice two-bedroom, two-bathroom condo for about $1,350 per month (check Zilpy.com). I could buy that same condo for, let’s say, $125,000 and homeowners association fees are $225 per month (check Redfin.com or your real estate agent MLS listings).
On the $125,000 purchase, my down payment at 20 percent is $25,000. Add another $7,000 for closing costs, financing and repairs and subtract your $8,000 first-time buyer’s tax credit (although you will not receive this until you file an amended tax return) for $24,000 to close — those expenses are also known as your equity.
In that example, the cost of monthly ownership will be:
Mortgage payment $568,
Property taxes $115,
HOA fees $225,
Total $1,032 in expenses.
Keep in mind, I am paying down my mortgage balance (saving money) by $109/month (the principal portion of my mortgage payment). So the total estimated costs of $1,032, less that $109 equals $923 total cost per month.
So I am saving $427 ($1,350 rent cost minus $923 ownership cost) per month by owning this property. Multiply that $427 times 12 months, for $5,125 in savings per year.
Recall I invested $24,000 to buy this property, and my net savings are $5,125 per year. That means instead of leaving my $24,000 in the bank earning 2.5 percent, I can effectively earn 21.35 percent on my money ($5,125 savings /$24,000 equity). That is worthwhile!
This analysis does not show good results in areas where prices are really high compared to market rents in that area, or where there are really high HOA fees. But there are other reasons for buying property — a place to live, you love the areas, etc. So use this as one tool in your toolbox.
Use the Rent vs. Own spreadsheet on my website to analyze your property. Also, this does not include any long-term appreciation in value or tax benefits, which could be substantial.
On the price declines, forecasting the future is tough to do. Moderately priced areas when prices have already declined significantly and investors are fighting over properties probably are close to stabilizing. Higher dollar properties have a higher risk of additional declines and time will tell.
If you have more questions for Leonard Baron, please leave a comment or send an e-mail to firstname.lastname@example.org.