As I enter my 28th year of life, I am met with several new financial challenges, questions, and opportunities. One of the most daunting decisions we currently face is the biggest purchase that young adults take: buying our first home. But, with so much debt already, does it make more sense to take the plunge and buy a house, or continue to rent?
The Case for Buying
One of the most frustrating things in my life is the rent payment. On the first of every month, we cut a check to our landlord for $1,432 (rent +water), which is about average for a two bedroom apartment in the Houston city limits. Every time that check is sent, I can almost hear an audible “flushhhhh” sound. Despite our monthly payments, we build no equity in the apartment – our ownership remains at zero. It is heartbreaking, and feels like we are throwing away money while simultaneously lining our landlord’s pockets . Couple that with the already hefty monthly debt obligation, and the pain is more pronounced.
With home ownership, you build something. Even in the beginning of the mortgage payments, the amortization (what allocation of payment goes to interest vs principle) allows you to build real ownership of the house. I imagine that this feeling would be quite powerful, and the monthly housing payment wouldn’t be so painful if I knew that part of it was helping to build equity and subsequently net worth.
Another benefit of buying a home is that it opens up the opportunity for another revenue stream further down the line. Let’s say we buy a starter home in Houston, a 1,700 sq. foot 3/2, for $150,000. As our family and wealth grow, there may be a need for a different, larger home. So, we move out and buy a new home, let’s say this one is 3000 sq. feet and 4/4. If we are wise, we could rent out the smaller home while we live in the larger home. Rent for a house should be anywhere from 0.8% to 1.1% of the home’s value every month. In this case, that would be $1,200-$1,650 in rent per month. I understand that not all of that money would be pocketed – mortgage, maintenance, and property taxes will take a chunk. But it will still allow us to make a modest profit and grow net worth relatively passively.
As it stands right now, Houston has one of the most affordable housing markets for a large city in the United States. The examples I gave in the previous paragraph were not fictional – we really can buy a decent home in a good neighborhood for less than $200,000. Considering the relatively high salaries in Houston, it makes for an outstanding income to cost-of-living ratio. In fact, Forbes ranked the Houston metroplex as #1 on “The Cities Where Your Salary Will Stretch The Furthest 2015.” Given our combined salaries, we could certainly handle the mortgage, property taxes, and upkeep of a starter home. We wouldn’t find that in any other city in the nation. Combine this with the fact that mortgage interest rates are still absurdly low in comparison to historic rates, and the deal is even sweeter.
The Case for Renting
The biggest advantage of renting is the freedom that it brings. If I have a bad neighbor or landlord, I can pick up and leave at the end of a lease with little to no cost aside from moving. We wouldn’t be able to do that if we were owning due to the time it takes to list the house, sell, and close the deal. Not to mention, the process doubles when we go to buy a different house! After all the costs associated with buying/selling, it is almost always going to be cheaper to rent unless you decide to stay put for at least 3 years. So if you buy, you better like your neighbors, because you are stuck with them for the foreseeable future.
Next, renting means you aren’t stuck with the bill for any maintenance associated with the property. If the A/C doesn’t work (which is a necessity in Texas), just call the property manager and poof, someone is there to fix it. Landscaping? Done. Pool? Clean and ready to go. All of these things come with a premium, but the convenience and hedge against risk may be worth it.
Let’s consider one of the biggest expected expenses with owning a home – the roof. Roofs (rooves?) have a lifetime of 20-25 years on average. When they need to be replaced, it is a doozy. Home Advisor states that the average cost to replace a roof in Houston is $7,516, with the costs ranging from $5,300-$10,000. Depending on where you live and the complexity of the roof, that price could be even higher. Our friends at Afford Anything give an estimate of allocating 1% of the home’s value to repairs and maintenance annually. So in the case of our hypothetical $150,000 home, we would set aside $1,500 a year towards maintenance. That seems about right, but it doesn’t account for timing of maintenance, which I will cover next.
It’s easy enough to follow the 1% annual rule for home maintenance. But, you are still at a big risk when it comes to home ownership. Murphy’s Law states that if something can go wrong, it will. To add to Murphy’s adage, I would say that things that are going to go wrong tend to go wrong all at once. When it rains, it pours. In this case, that rain may end up in your living room. You may have thousands of dollars saved in the home maintenance fund, but who says that all the maintenance will be so nicely spaced out? When you rent, all of that uncertainty vanishes.
After extensive discussions with my wife about this, we have decided to begin doing some more serious research about home ownership. I’m not sure we are quite ready to take the plunge… yet. But with thorough preparation, I am sure that we will be ready soon, likely within the next year or two. That way we will have plenty of time to save up a down payment, shop around, and continue to pay down our student loan debt. In the meantime, I will continue to write blog posts, talk to others in the community, and read tons of books. We may never be certain that the time is right. But, fortune favors the prepared, so we will do our due diligence to position ourselves as best as we can.
Do you rent or own your home? Do you have any tips for us or the readers? Let us know in the comments below!