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Your parents might not explicitly say it but you're seeing hints.
Living with 3 roommates is fun until it's not.
You finally met the one and decide to build something together.
Your favorite YouTube real estate guru who makes his active income by selling you on passive income, convinced you it's time to buy a property.
Or you're like me and like to Google questions like "where should I live?" and got to some silly quiz that always answers California.
While I'm not here to debate the philosophical question of where to live, I'm more financially inclined to answer that question.
Unless you are living with family or in a hippie commune, you have 3 options to acquire a place to live: Buy Cash, Rent, Buy with a Mortgage.
Buying Cash
With the median house price in the US in Q3 2022 being $467,700 (according to the Federal Reserve Bank), it's arguably not the best financial decision to buy a property cash, if you have the money.
An acquired $467,700 property will still have taxes and insurance (unless you don't want to insure a half a million dollars) to be paid.
If you were to put 5% down payment and get a loan for the remaining $444K, the monthly payment for a 30 year fixed mortgage at 6.5% interest rate is $2,979.
Consult with a financial planner and they'll use that $467K in a more productive way where the monthly mortgage payment would make sense to keep.
As it is, the mortgage debt has the lowest interest rate of all financial debt vehicles. At the time this was written, the average personal loan rate is around 12-15%, average credit card rate is around 24%, average business loan around 12%.
Even if you own your property free and clear, it'll be the cheapest option to take a mortgage as opposed to the other debts.
So you're left with 2 options, rent or take out a mortgage to buy.
Rent
Renting is pretty straight-forward. You agree with the landlord or the management company to pay a specific amount for a specific period. Usually it's a year lease. Your maintenance duties are clear in the contract. The utilities you have to pay for are also mentioned. Depending on the type of property, those are usually internet, cable, electricity and water. We'll use the example of a Single-Family Residence.
Renting is usually a good option when you don't have stability. Maybe you'll move in the next year to a different city, maybe your household is growing or shrinking. Until these aspects stabilize, it's most likely easier mentally and financially to just rent. Unless you're getting a great deal on a purchase. But keep in mind that the average annual rent increase varies between 5-6% in normal years. let's take 5% as an example. If you're paying $3,500 for rent right now (average rent for a Single Family in Broward County), in 5 years, it will be $4,466. In 10 years, that $3,500 is $5,701. So renting is best used when it's done shorter term.
Mortgage
A home loan allows you to buy a property with as little as 3-3.5% down payment, live in the property, "lock in your tax increase rate with homestead exemption" (at least in Florida), gain appreciation and customize the property to your liking.
let's break it down, we'll use the median value as example. for a $466,700 purchase price, you're putting a 3.5% down payment of $16,345. Closing cost estimated about $12,000, plus inspections and other fees, you're spending close to $30,000 to get the property. With a conservative yearly appreciation of 4%, the property you bought a year ago is worth $485,368. So you've gained $18,668 in ONE year after spending $30,000 initial investment. That's a 62% return-on-investment. Now keep in mind if you do sell the property it will cost about 6-7% of the price, so this really needs a year or 2 to break even but after that, you're gaining compound appreciation on the property.
You might say but I'm paying monthly for this "investment," yes but if you were doing the alternative (renting) you are still paying the same payment (if not more), only with rent you don't gain any appreciation.
Payment
If you opt for a fixed rate mortgage (which is the most common type of amortization), your principal and interest payment is fixed for the length of the loan or until you pay it off in full.
a portion of that P&I payment is going towards your principal, effectively making it a forced saving. Due to the way a mortgage "amortizes" the principal portion is significantly smaller at the beginning and increase every month, while the interest portion is the exact opposite.
The taxes paid on the property, are increasing at a much slower rate than your landlord's taxes (that you pay through rent) due to homestead exemption (reference taxes blog).
The homeowner insurance is what it is, this could change with new insurance laws and policies and with the house aging. But if you were a renter, the landlord is paying for insurance (so it's you by proxy) and you are paying for renter's insurance, which in combination must be higher than having one policy.
Moving
We always try to make sense financially of the decision to buy a property, but, while it's usually the best financial decision, we tend to ignore the emotional benefits of owning a home. Not having to move every couple of years is high up on my list. Also, having the freedom to decorate and customize your property to your liking and needs, creating lifelong memories with family in friends. Having a place of your own is important for stability and growth.
Thank you for reading the blog. I would love to hear your thoughts about this. Please reply in the comments below or email me at eli@mxmtg.com
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