Renting Versus Buying a Home - What is it that You REALLY Want?
Renting versus buying a home can be a tough question to answer. Especially when there are so many lies and misconceptions out there hiding the truth. First, let's get one thing straight. One very important question you'll need to answer is "What are your goals?" If your goal is to live in a home that will be admired by your neighbors (no pre-judgment here, just laying the cards on the table), then your answer will be different from someone who's goal is to build wealth. If your goal is to impress your neighbors, you can go ahead and stop reading right now because what I'm about to share, about renting versus buying a home, probably won't do you much good anyway. If your goal is to build wealth, you'll need to be aware of the following lies that will cloud your vision and disable you from determining which is better, "renting versus buying a home".
7 Great Lies to Renting Versus Buying a Home
Renting, on the surface does look like throwing money away. Sometimes it pays to look beneath the surface. Here's what I mean. If you get a 30 year mortgage for $184,000 with a 6.75% interest rate, payment #1 would consist of $1,035 to interest. At the end of year 5, your interest payment would still be of $973. For 5 years straight, you'd be dumping over $973 dollars into a bottomless pit. The interest pit. This is essentially paying "rent" on the money you borrowed and is money you'll never see again. The argument could be made (and made well) that for the first 5 years of "home ownership", you're throwing your money away. What if you rented an apartment for $500 and invested the difference of $500 @ 3% over the same five year period? The answer is, your cash account would be worth a little over $32,000. How bout' the equity you'd have built up in the house after making payments? The principle amount aver 5 years of making the minimum payment would be worth $6,690. Let's see... $32,000... or.....$6,690, you do the math. To be fair, we must look at the appreciation on the house right? Well, that depends. Considering what's happened in the housing market recently, the appreciation could realistically turn into depreciation very quickly. Appreciation on a home is what I like to refer to as "ifcome". If it comes great, if it doesn't, it certainly can't be counted as "income"... It's "ifcome". :) Even if we earned a 0% on the $500 we set aside, let's say we stuffed the money under a mattress or something, the cash amount after 5 years would still equate to $19,000. And...$19 grand still beats the socks off of $6,690. Renting versus buying a home looks like a good option here wouldn't you agree? Now for whopper #2. Robert Kiyosaki did a great job debunking this myth in his book "Rich Dad Poor Dad". He taught that assets make you money and liabilities cost you money. If you're buying a home to live in, I'd be willing to bet, that home is going to cost you way more money than it will ever make you. Thus, the house you live in, is a liability because it costs you money. And you say, "wait, I know people that have sold their homes for thousands more than they paid for them." Aahhh, point well taken. Here's the kicker. What about all the interest, property taxes, maintenance costs and insurance they paid while living in the home? Oh, and what about the closing costs and Realtor costs they incurred to buy and then sell the home? 9 times out of 10 taking these expenses into the equation will cancel out any profit that appeared to be present. Bummer! Looks like renting versus buying a home might really be something to look at. Well, that means, if you paid $1,000 in interest, your tax liability would be reduced by $300. So, you would save $300 on your taxes. But wait, I had to spend $1,000 to save $300? "Uhhh, yeah." But hey, that sounds like a great deal so please go out and get a loan so you can buy a home to save money on your taxes. LOL When you rent and do nothing more than rent, it's true you don't build equity. When you pay your mortgage, you do build equity, albeit very slowly. When you look at the big picture and take into consideration the fact that renters can build equity in other ways (like saving, and investing in stocks or rental real estate) you start to see how whopper #4 only gives you half the picture. "Home owners have a big liability. Renters have assets if they invest the money they save on their housing expenses in other areas." Homes appreciate and depreciate. Betting on the "ifcome" can be a good strategy as long as you understand that it's a gamble, not a guarantee. The fact is, owning your own home is a wonderful thing. But what does "ownership" mean? Does it mean you own the house but rent the money used to buy it? Or... does it mean you used cash to buy it free and clear? I would argue that owning your home FREE and CLEAR is the real American dream. Oftentimes this can be achieved faster, more efficiently and safer by holding off on the purchase of a home. Don't let your dream of home ownership thrust you into a nightmare of slavery.
Do The Math!I'm not saying you shouldn't buy a house.What I am saying is, look at all the factors and do the math. A great way to make this decision is to run a scenario on both options. Do the math and see which option puts you into a better financial position 5 years down the road. Renting versus buying a home? The answer might surprise you. Return From Renting Versus Buying a Home to Frugal Living Return From Renting Versus Buying a Home to Simple Steps to Financial Freedom Home Page
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