By Leonard Baron MBA, CPA, San Diego State University Lecturer
Real estate has gone through a few tough years and many who are considering buying vs. renting are asking themselves, “Is now the time to buy?”. Realtors and the National Association of Realtors are telling us that today’s buying environment is the best it has been in years, maybe in a lifetime. Low prices and cheap financing! As an independent and neutral analyst on the subject, I can tell you that I fully agree that it is a great time to buy property.
Now that doesn’t mean any property, nor is it a great time to buy property for certain people, and add that to the difficulty of obtaining financing, means there are still some significant bewares and decisions that one must think through before deciding if it is time.
The most important thing in owning real estate is being a long term owner and buying what I call the “Right” property for you.
Short Term Ownership – First and foremost, we buy property in hopes that we are financially better off down that road than if we stayed as a renter of someone else’s property. For the vast majority of purchasers, the reality is that if you are not going to own property for at least five years, you are probably going to be financially better off and have a much lower level of stress in your life by paying rent to someone else.
The reason for this is that there are significant transaction costs on the buy and the sell that will probably wipe out any potential equity you may have hoped to earn on shorter term ownership. Additionally, you probably, but not always, pay more to own than rent so all those additional monies could have been saved and invested elsewhere. Owning real estate is also expensive, stressful, and time consuming…. And especially if you have to put thousands of dollars into a property you plan to sell in the next few years.
So the number one buying vs. renting tip is – buy property for the long haul. If you are in the military, a professional athlete, or just don’t know what your future holds… make life simpler and stay a renter.
But the RIGHT Property – If now you are a committed long term only buyer, you want to make sure the property you buy is the right property for you for all the right reasons. School district? Size? Location? Condition? Cost to get property into the condition you would like? Don’t rush to buy a property that you don’t “love”. Take your time, this is the largest purchase you will ever make and has significant financial risks – do the hard work upfront and right the first time around.
So figure out the most important items you want in a home and write them down. Talk to friends and family and get the list of items you want. Realize, you will never find the perfect property, but hopefully with a lot of hard work and thought into it, you will find something that matches your price range and desires and you can call home.
Rent vs. Own Differential – Lastly, make sure it isn’t too much more expensive to rent vs. own. Now fancier properties are usually much more expensive, and if you can afford it, and love it, go for it. But for the rest of us make sure that your hard earned dollars are well spent. So if you want to buy a fancy condo and you need to put down $50,000 to buy it, and it costs $3,800 per month to own and only $2,300 to rent, that is an extra $18,000 per year for the ownership privilege plus your downpayment. So make sure that makes sense to you.
Only you can make that decision. But those items above are the biggest mistakes I’ve seen people make – short term ownership, buying just to buy something, or buying where they can rent at a much lower cost.
So think those through as you consider your buying vs. renting housing options for the next few years and realize it is a great time to buy real estate – but only for the right purchaser and for the right reasons!
Author Leonard P. Baron, MBA, CPA, is a real estate lecturer at San Diego State University, a long term residential real estate investor and author of Real Estate Ownership, Investment and Due Diligence 101 – A Smarter Way to Buy Real Estate.
You can learn more about him and get his free – “Real Estate Buying Due Diligence Checklist” at professorbaron.com – under Chapter 1 – Due Diligence (no sign up or registration needed just download it!)