To buy or to rent? That is the question these days from many of my clients. While the housing market pricing has gone bonkers in the last few years, multiple offer sales situations are the norm, interest rates are rising and everyone seems to be a cash buyer, competing for homes can get frustrating after a bit. But for many the prospect of renting has it’s challenges as well, and clients worry they may price themselves completely out of the housing market by becoming renters.
I get asked this question so often that it seems appropriate to post about it again. While everyone has a different situation, here are some questions to consider when deciding what to do:
1. Affordability: depending on where you are living or looking to move, is it more affordable to buy or rent? Here in San Diego county in most areas it makes more sense to buy, despite inflated housing prices. That is because rents have risen $300 a month on average across the nation, according to Apartment List’s National Rent Report (and likely more here as people are literally offering to pay over listed rent prices to get into the scarce number of homes available for rent). On average that is $36,000 more dollars being placed in someone else’s pocket each year. Owning can be beneficial in many areas, so speak with your experienced real estate agent.
2. Financial Preparedness: If you do decide to buy you need to understand all the costs involved with purchasing (closing costs), and you need to have emergency and home maintenance funds, as things will break and need to be cared for when you own a home. In this inflated market many people scrape together all the money they have to purchase a home, yet do not consider the responsibilities that come with home ownership. It is often recommended to have 6 months of emergency funds available to cover living costs.
It is also important to consider property taxes, which in a high price market are of course higher. You need to be ready come tax time to pay those taxes, which in San Diego County are about 1.25% of the purchase price of your home (unless you are taking your tax basis with you from your prior home). Also if you are purchasing a home for a higher value that last time it sold (which is usually the case), you need to be aware that you will also receive supplemental tax bills in the first year. For those who do not have the savings for these situations, renting may be a better option, with the plan to put money aside each month to save for a home to buy.
3. You Need to Be Comfortable with Your Monthly Payments: I have clients telling me all the time they are preapproved for a certain amount, yet when they find homes within their parameters with high HOA fees, mello roos taxes or other costs and realize that will put a dent in their pocketbooks, they have to recalculate. Similarly, property taxes will of course be higher the higher the price of the home, and you have to also consider insurance, maintenance and other expenses. No matter what a mortgage professional or bank tells you is affordable, the most important thing is that you can make the monthly payments comfortably. Most experts say your monthly payments should not exceed 25-35% of your gross income.
4. Do You Plan to Move in a Few Years or Stay for a Longer Time? If you are purchasing a home that you plan to stay in only up to a few years, it may make more sense to rent. This is because it is expensive to move and there are closing costs involved in buying and selling a home. But if you are in it for a longer period of time buying is a better option (assuming you have the down payment and have considered the points above).
Purchasing a home is a big financial decision and should never be made quickly or lightly. Make sure you have all your questions answered, understand the costs involved in both closing and homeownership, have money put aside for taxes and supplemental taxes as well as an emergency fund, make a plan with your financial advisor or CPA, and work with a highly skilled real estate agent. If you are not prepared then renting may be your best option.