The most common mistake we see when people are trying to decide whether to continue renting or to purchase a home is that they compare their current rent payment vs. their future housing payment. The problem with this is it’s like comparing “Apples to Oranges.”
Before we jump into why that is, please keep in mind that our goal, when helping a client with the decision to buy or continue to rent, is NOT to convince you that buying makes sense, because quite honestly, it doesn’t always make sense.
Our real goal is to give our clients all of the information, education, and advice that is necessary for them to be 100% confident in whatever they decide to do. If at the end of our consultation, you decide that now is not the right time, that is perfectly OK, and we’ll work with you to create a strategy, timeline, and roadmap, to help you when and if you are ready. Alternatively, if at the end of the consultation, you realize that it is in your best interest to buy a home, we’ll take the necessary steps to help you accomplish that goal.
So, the real question then becomes, how do we help you REALLY compare renting versus owning? It’s simple; we work through a series of questions that helps us make a fair comparison, then we analyze the numbers.
“If you ultimately decided that renting is the best choice, moving forward, could you happily and comfortably live in your current rental property for the next 5+ years?”
We ask this question because the typical answer is, “No, we would want to rent something bigger, better, or in a different location.” This makes sense because it’s usually the reason that you’re thinking about buying a home in the first place.
Because your answer is most likely, “No,” we want to figure out how much it would cost you to rent that new place that you would be comfortable in for the next 5+ years. This number is typically around $300 to $500 more per month, and then you are paying for rent right now.
So, step one would be to compare the “Future Rent” versus the new housing payment, because you don’t want to analyze where you aren’t going to live to where you are going live, you want to compare where you would rent versus where you would buy.
“Are you aware of the projected rental rate increases in the area that you live in now, or that you’re looking to move to?”
We ask this question because when you rent a home, you’re housing payment is not a “FIXED” number. Most cities in the United States are experiencing a 3% annual increase in rental prices, so we help our clients look that up based on where they want to live.
From there, we look at the next five years, and we project what the average rental rate would be, to determine what you would be paying to live there, should you continue to rent. Keep in mind; it doesn’t make sense to compare a current rental rate that will increase each year, versus a fixed housing payment that won’t go up but can go down over time.
“Do you know what tax benefits you may have when buying a home?”
Most people know that there “might be a tax benefit,” but we don’t think that is good enough. So, we help each client by taking them through the tax benefits that they could potentially see, by buying a home, and we can include your CPA or Tax Planner in this discussion as well.
This is called an “After-Tax Net Payment,” and it’s important to know when buying a home.
“Have you factored in the principal reduction of making a mortgage payment and an expected appreciation percentage over the next five years?”
Most clients forget that when you make a rental payment, 100% of that payment goes to your landlord, but when you make a mortgage payment, at least 30% of that payment goes back to you in the form of principal reduction, which we look at as “Forced Savings Account.”
Also, most clients don’t look at long term appreciation, so we use a forecasted real estate appreciation percentage, to show you what the home could be worth in 5 years.
These two items help to paint a more appropriate picture.
When we consult our clients through this in-depth analysis, we’ll talk through the positives, the negatives, and, most importantly, how to ensure that you can be protected from any market changes. At this point, you would have a complete comparative analysis of renting versus owning a home. Then, we take the next steps.
If you have been a victim of being “scarred by an internet mortgage calculator,” we understand, and we’re here to help. It takes a team of experts to educate you to make a confident decision, and that is what we enjoy doing. And most importantly, know that whether or not you ever decide to buy a home or continue to rent, all we care about is that you are confident in that decision because you have done the research and know what’s best for you and your family.
Contact us today, and we can review your options and answer any questions.
Contributor: Ryan Grant – NMLS 118767 | Producing Branch Manager for The Ryan Grant Team | Fairway Independent Mortgage Corporation