There are 10 million articles out there from the real estate professional on whether should you buy or rent a home. I’m not going to repeat what they said.
What I’m going to offer though, is a different perspective from my experience on how I decided to buy a home in 3 easy data points.
Seriously, you don’t really need to overthink too much. Actually, this is a super simple decision.
Let the fun begins!
Data Point #1: Owning a House is an Investment + Utility 2 in 1
Let me set the bottom line first. There are rarely any investment that you can also physically use it. I’m not talking about buying a home to rent out to other tenants. That’s a separate topic. I’m talking about buying a home for you and your family to live in.
When you pay the rents, it’s an expense to the third party. You’ll never get those back.
It’s not tax deductible neither.
However, if you own a house, you are actually paying the mortgage for the future you. Assume you have a 30 years fixed mortgage, your home will totally belong to you after 30 years.
If you pay enough down payment to begin with, your monthly mortgage + property tax can be around the same as the rental price. Check out my other article on How To Elegantly Save Up For a Downpayment. I’ll show you 4 hacks to save up your money.
These being said, should you buy or rent a home is not even a question. Your question should be around WHEN should I buy a home.
That leads us to the next data point.
Data Point #2: Are You Going To Stay In the Same Area for Long Term?
When I say long term, I mean 10 years. How the heck I came up with 10 years? That’s the least period duration to minimize the possible risk. Let’s look back in the subprime mortgage financial crisis back in 2008, all the housing prices had a good hair cut to around 50%. It was big, right?
Lehman Brothers, gone. Merrill Lynch, absorbed. GM, bankrupted. Tesla, almost died in infancy. Glad it didn’t. Hey, do you still remember Washington Mutual and Country Wide? How dare you didn’t remember.
I believe you’ve got the point. Now, assume you were “lucky” to buy a house at the peak right before the crisis. Will you be very screwed up? Yes, you would be. Your question should be “am I screwed up” OR “am I really really really totally absolutely screwed up?”
If you were playing safe with 20% downpayment with 15 or 30 years fixed term mortgage, you would be just in the regular “screwed up” category.
If you were playing interest only variable blah blah creative mortgage, then I didn’t know what to say.
ONE good news though, home prices always appreciate in long run.
Now, if you compare the housing prices in different areas between 2008 and 2017, many housing prices are either recovered or beyond the peak.
I’m going to show you from the most popular area to relatively the least popular area in Northern/Central California.
San Francisco housing prices 2008-2018 from Zillow:
This is Gilroy housing prices 2008-2018 from Zillow:
This is Fresno housing prices from Zillow:
Within 10 years, you can see San Francisco has already beat the peak in 2008 and beyond already. Fresno, which is a less popular area, is still catching up but very close to the break even point. Yes, a major financial crisis takes about 10 years to recover.
That’s how I came up with 10 years as the data point to decide on whether should you buy or rent a home question.
During those 10 years, does it really matter if the price goes up and down if you live in your home anyways? The answer is no. When the price goes down, you are going to live in the house anyways. When the price goes up, what, are you going to sell your house then sleep on the street because all your housing prices in the neighborhood are all jacked up anyways?
Unless you sell your house in San Francisco, then buy a house in Fresno. Otherwise, price fluctuation doesn’t really matter too much when you live in your house.
Data Point #3: Stability Matters, Somewhat
When you own a house, it’s hard to liquidate. That’s the downside of it. Unlike stocks or bitcoin where you can just sell it in minutes, house takes weeks to sell. The process is hectic sometimes.
Financial stability matters. Most of the full time employments today are on at-will basis anyways. Anyone can lose a job in any day. There’s no guaranteed. The most important thing is your have marketable skill sets and competencies.
Make sure you always have at least 3 months of reserve at your bank. Good news is that the bank takes more than 200 days to officially sell your house if you default. That is much much longer than if you don’t pay your rent. If you don’t pay rent for about several months, your landlord is going to evade you asap.
On the other hand, banks don’t really want to own any houses. They’ll try their best to make you pay the mortgage instead.
Relationship stability matters. If you buy your house before marriage and you can afford the mortgage all by yourself, then there’s no problem at all. You can still own 100% of your house even if you go through divorce because you acquired the house before marriage.
Some of the more expensive areas though, it’s super hard for 1 person to afford the mortgage plus downpayment. It usually requires both you and your spouse’s buying power to afford the house, even before marriage.
What if you two break up within 10 years? Then you guys will either liquidate your house or rent it out, depending on the market situation.
What if one of you accidentally passed away within 10 years? Is your spouse the automatic beneficiary or your parents? If you want to automatically hand over your 50% shares to your spouse in the event of your death before your marriage, you can look up “Joint Tenancy” on the title.
If you want to automatically hand over to your siblings or your parents in the event of your death before marriage, you can look up “Tenancy In Common” on the title.
Both of you should have open and transparent discussions around the worst case scenario before buying a house.
- Owning a home save you in a long run: You can live inside your investment on day 1. How cool is that?
- Buy if you foresee yourself to stay in the house for 10+ years: That’s the amount of time for a economic recovery. In the worst case scenario where you bought your house at the peak, you still have time to at least recover.
- Mitigate risks on any instabilities: Nothing in life is guaranteed, whether it is job or relationship. Don’t let those potential instability scare you off from buying a house though. Just think through some contingency plans for the worst case scenarios and discuss openly with your spouse.
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Disclaimer: This is based on my personal opinion. You should always consult your financial or tax adviser for any official financial matters.