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| Tips For Home Buyers: Best Investment |
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Each month, John Doe pays $2,000
to rent a townhouse in an affluent Calvert neighborhood. Although
Doe could afford to buy a nice home, he doesn't want to. Why, he
wonders, would you want to fritter away your cash in
mortgage
interest
and property expenses when you can invest in the stock market?
It's a good question, especially considering that Doe's financial
investments have returned an average of 20 per cent a year since
1982. But, while Doe's neighbors may regard his bulging stock portfolio
with envy, few of them are ready to follow in his footsteps. As
recent real estate boomlets in Calvert and surrounding counties
have demonstrated, Marylander's still regard a home as their best
investment. After all, conventional thinking has always insisted
that renting is like burning money.
Our results show there is still a lot to be said for conventional
wisdom. In general, owning your home offers greater rewards than
renting -- but only if you are willing to stay put for the long
haul and, once you've paid off your
mortgage, invest your savings
from home ownership.
The heart of the matter is how much you pay in rent versus how much
you pay in shelter costs.
We're the first to admit that our results aren't clear cut. If you
live in high-cost northern Calvert, renting still makes loads of
sense. If you plan on moving frequently over the next 25 years,
renting also wins out. But if you're an average Marylander, rooted
in a typical town, buying a home can put you miles ahead of your
renting counterpart.
The heart of the matter is how much you pay in rent versus how much
you pay in shelter costs, including
mortgage payments, property
taxes, building insurance and maintenance expenses. A handy rule
of thumb that emerged from our analysis is the 0.6 per cent rule:
if you can rent a home for anything less than 0.6 per cent of its
purchase price, you are likely to be further ahead as a renter;
if your rent is above that 0.6 per cent level, the balance shifts
in favor of owning.
By this standard, Doe is right to be renting. His townhouse is valued
at $700,000, which makes his $3,500 monthly rent only 0.5 per cent
of the house price. Even if his investments were producing more
modest returns than they have been, renting would probably still
make sense for him.
What's surprising is that home ownership proves to be the superior
strategy in these cities despite the generally modest forecasts
for residential real estate. Most experts warn that house prices
are more likely to crawl than soar over the next few decades.
That era was created because of the shortage of houses and the baby
boomers. The number of 18- to 34-year-olds has decreased in Maryland
every year this decade, reducing the supply of first-time buyers.
Furthermore, when baby boomers begin dying out in 20 years, home
prices may actually begin to decrease. Lawrence Jones, professor
emeritus at the University of British Columbia's centre for Real
Estate and Urban Land Economics, agrees: "I think it would be foolish
to go into the housing market counting on getting lucky and having
a 5 per cent , 10 per cent or 15 per cent per annum return."
In the short term, renting always outpaces buying because land transfer
taxes plus legal and closing fees are sunk into the initial purchase
and have to be paid off over time.
So if home prices aren't going up quickly, what makes home owning
so desirable? The answer lies in what happens to renters and homeowners
over a few decades. Renters can expect to pay rents that will move
upward at roughly the rate of inflation so their costs for accommodation
never decrease in real terms. To make matters worse, they can't
recover any portion of their costs -- once paid, their rent is gone.
In contrast, homeowners can expect to shell out less and less money
in real terms, as mortgage payments and inflation reduce the amount
of the
principal they still owe. Over the long run, more and more
of their monthly payments become recoverable since that money goes
to pay down their principal and can be regained when the house is
sold.
Remember, though, that we're talking about the long run. In the
short term, renting always outpaces buying because land transfer
taxes plus legal and closing fees are sunk into the initial purchase
and have to be paid off over time. In just about any scenario we
tried comparing renting with owning a home for less than five years,
renters came out ahead.
The real advantage of home ownership only materializes if you plan
on remaining in your home for a long time and if you invest the
savings that result from home ownership. For example, our model
suggests that if you buy a home in Maryland and don't invest what
you save from renting over the next 25 years, you will wind up about
$101,000 richer than if you had rented. But if you buy the house
and invest your savings from home ownership over 25 years, you end
up with $643,000 more in the bank than if you had spent those years
as a tenant.
All of our number crunching goes to prove one point: when you buy,
buy wisely. You can no longer afford to regard a home as your only
investment. Nor can you afford to move every four to seven years
-- as was the practice in previous decades -- without potentially
negating any benefits of ownership. You should buy a house
the same way you would any other investment -- with careful analysis,
substantial market insight and a view to the long term.
Excerpt from story by Andrew Wahl
Home -
Up -
Your Best Investment - Buying
an Automobile - Changing Jobs
- The Closing Date
Earnest Money Deposit -
Home Buyer Tips -
Home Inspection -
Market Condition
Moving Money Around -
Your Offering Price -
Property Condition -
Seller Disclosures &
Disclaimers
Settlement Service Providers
- Income Tax Savings -
Writing Offers
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