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The Top Three Reasons Why Not to Buy a House

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December 3, 2018
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The Top Three Reasons Why Not to Buy a House

why not buy a house

The Renter Dream, Saving Money

You come back to your place after a grueling day at work.  Your boss was on your case about being late on a project, you had to work late to finish your colleague’s work and you forgot your headphones so you couldn’t pass the time with slow jazz like usual.  When you get home, you notice the electricity isn’t working in the kitchen and your cat spilled your half-drank coffee onto the carpet while you were away.  Good thing you rent.  That’s the landlord’s problem, not yours.  Renting keeps things cheap.  You don’t have to pay for upkeep and pay less than you would for a mortgage.

 

Everyone *Thinks* Renting Saves You Money

The average rent in Washington is $1,995 while the average home price is $340,000.  The cost to purchase definitely seems more intimidating!  Let’s imagine you used a FHA Loan to finance a $340,000 house:

  • $12,000 up front down payment (unless a secondary loan is used to cover part of this down-payment cost)
  • $2,377 monthly payments for the mortgage, taxes and insurance
  • $200 monthly for normal home repairs

savings in buying a house

Obviously you’re saving money in renting right?  $1,995 monthly is much less than $12,000 down-payment plus $2,577 monthly.  It’s easy to see here why not to buy a house.  HOWEVER, when you’re paying $1,995 monthly in rent, 0% of that money goes to you.  When you pay your mortgage, about 40% of that money will go to you (paying down the principle) over the lifetime of the loan.  Even if you only live in the house for one year, about 20% of those monthly payments and 100% of the down payment are paying the loan principal… that is essentially money you are paying yourself.  So let’s compare, taking that into consideration.

 

Renting Over One Year

COSTS:  -$1,995/month (rent) = $23,940

EARNINGS:  0$ = 0$

NET:  – $23,940

 

Purchase Costs Over One Year

COSTS:  $12,000 (down payment) -$2,377/month (mortgage) – $200/month (repairs) = $42,924

EARNINGS:  20% x $2,377/month + 100% x $12,000 = $17,704

NET:  – $25,220

 

What You May Have Overlooked

It looks like renting will cost you an average of $1,280 less than buying a home during the first year.  This is true, but we have forgotten to mention a huge benefit to owning a house that renters don’t get to take advantage of.  You own an asset.  Property values may rise and fall but they will always gain value over time.  Let’s incorporate the past year of appreciation into our above calculations.  For Washington, this was about 8% over the last year.

 

Purchase Costs Over One Year (With Appreciation)

COSTS:  $12,000 (down payment) -$2,377/month (mortgage) – $200/month (repairs) = $42,924

EARNINGS:  20% x $2,377/month + 100% x $12,000 + $340,000 x 8% = $44,904

NET:  + $1,980

 

Actual Reasons You May Want to Rent

In most cases, if you’re renting just to save money, you’ve made the wrong choice.  There are, however, some actual reasons why you may want to rent instead of buy.

Uncertainty in the market:  You can see above how powerful appreciation can be.  Buying a house a year ago instead of renting could have earned you $1,980 on average instead of paying $23,940 to a landlord.  Property will always appreciate in the long term, but how secure is it to rely on short term appreciation?  As with most investments, the real estate market fluctuates.  The example above showed you how much you can save considering the appreciation over the last year, but what happens when your house actually depreciates?  If you only plan to live in a house for a short period of time, you run the risk of your house losing value before you decide to sell.  The numbers below show how much a house would cost you over a year if you purchased right before the crash in 2008 and sold a year later, experiencing a 15% depreciation.

why not to buy a house

Purchase Costs Over One Year (With Depreciation)

COSTS:  $12,000 (down payment) -$2,377/month (mortgage) – $200/month (repairs) = $42,924

EARNINGS:  20% x $2,377/month + 100% x $12,000 – $340,000 x 15% = – $44,904

NET:  – $87,828

 

As you can see, the short real estate game can be quite risky.  This is what home owners experienced during the most recent real estate crash and it will happen again in the future.  If you fear the market is about to turn, and you don’t plan on keeping your house to live in or rent for the long-term, it may be best to rent.

Convenience:  The numbers above are for the average homes to purchase and rent.  This changes drastically if you plan to live close to the city or work for convenience.  For example, renting in downtown Seattle may not be much more than the $1,995 shown above, but buying a house in downtown Seattle would be much more expensive than buying the average home.  It may still save you money in the end to purchase that $1.5 Million shack in the city instead of renting, but you wouldn’t be able to afford the monthly payments to get you to the end of that road to savings, landing you in foreclosure.

Discipline:  Let’s face it, some of us haven’t quite matured to the point of home ownership yet.  Even in an appreciating market, your house will depreciate if you don’t have the discipline to take care of it.  Fixing broken things is part of home ownership.  If you don’t keep up with the repairs, you could end up selling your house for a loss in the end.

Summary

Buying or not buying a house is one of the biggest decisions you’ll make financially.  It’s best to consider all aspects of the decision.  Start by asking yourself these questions:

  1. Am I responsible enough to care for a house?
  2. Do I plan or have the ability ability to hold on to the property for 5+ years (live in OR rent)?
  3. Can I live with the inconvenience of living outside of the city?

If you answered yes to all of these questions, your next step is to buy a house!  If you answered no to any of the questions, you may want to rent for now.  Do you need more help in making your decision?  Don’t hesitate to contact us!

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