IT DEPENDS! Due to the costs and responsibilities involved with buying and holding real estate, there are many factors that need to be taken into account and the answer will depend on the person and where he/she is at any point in his/her life.
Historically, real estate has gone up in value. In theory, the longer you own real estate, the greater the odds you’ll be safe no matter what the market is doing at any point. I’ve had 60+ year old clients buy their first home through me. Over those last 4 decades of renting, they’ve paid of 1 or 2 mortgages for their landlords and, without equity are buying in the same price range as their 20-30 year old counterparts (all other things being equal).
The first question you should ask yourself is “How long will I be willing to own this piece of property?”
If the answer is less than 3 or 4 years, renting is likely to be the best option. Due to the costs of buying and selling (2% on the purchase and 7.4% on the sale) it will likely take several years to make it worth buying…based on a 3% annual increase in property value. Between 2000 and 2005, we were seeing 20% appreciation compounded annually. Between 2006 and 2010 most areas saw declines (some very steep declines) in property values. 2000-2010 account for a very unusual period of history as far as property values.
The second question you should ask is “what is the likely rate of appreciation during the time you’ll own the property?”
Check with a knowledgeable Realtor like Jim Roy for his prediction on where the market is going based on current trends, lenders policies, future inventory etc.
Next: ask yourself “Am I comfortable fixing (or hiring a contractor to fix) problems that arise?” “Do I have the funds to deal with something that comes up?”
If you have the will and funds to repair something, you’ll be in control of the quality of the repair rather than entrusting the choice to your landlord. Many of which use inferior materials that you have to use daily while renting their place. Before buying the home, a home inspection will tell you what you’re likely to face in the next 1-10 years so you can begin budgeting for these expenses.
Next: ask yourself “Am I OK paying off someone else’s mortgage?”
It’s a silly but fair question. Many tenants take issue with the feeling that they’re throwing their money away each month. At the end of the month, all they have to show for their rent is the place they’ve lived for that month. I know this feeling. I rented for 6 months when I moved to the DC area and was happy to buy and start building my own equity.
Financing: “Do I have the down payment, cash reserves, income and credit score to make this a reality?”
If no, you’re not alone. Many people are planning and saving to put themselves in a position to buy. They’re working with a lender to fix any credit issues so as to get the best interest rates. However, if you’re currently ready and nothing else is holding you back, there’s no need to wait. Some buyers wait too long thinking they need more in reserves and miss out on the right house, price or interest rates. In general, I advise 2-3 months of saving, 3.5-10% down and a credit score above 620 although I’ve helped people buy with no money down, less savings and lower credit scores as they were ready for other reasons.
“Are you comfortable BEING a landlord?” If the home you’ve bought is under water and you need to rent it out rather than sell, can you handle having a tenant? As the owner of many rental properties, I can tell you that done right, it’s very easy. The horror stories I’ve heard about bad experiences from other landlords have many things in common including: poor planning for issues, poor decision making when issues arise and poor selection of a tenant.
“Are you comfortable HAVING a landlord?” I don’t like moving. Most people don’t. Having a landlord means the possibility that at the end of your lease (usually 1-2 years) you may be told you need to find a new home. You may be told the rent is going up. You may be told that your heat will not be fixed for another week until they save some more money to fix the furnace (in 1999 I learned that shampoo freezes when this happened to me in that 6 month rental).
“Do you think interest rates will increase in the near future?”
A 1% increase in interest rates can result in a huge increase in monthly payments bringing certain properties out of your price range. If you buy and interest rates go down, however, you are likely to be able to refinance and take advantage of lower payments. Note: this will be impacted by several factors including the value of your home, lenders’ guidelines (which are always changing), etc.
