Monday, January 28, 2013

The Great Debate: Buying vs. Renting

Could you imagine getting into the shower and instead of having only two variables to control—turning the water on and temperature adjustment—there were fifteen!?  Well that is actually quite comparable to how many factors need to be weighed when making the decision to buy versus rent a home.  One of the most common anxieties surrounding the decision sounds like this:

            Boy, I can’t believe I am paying (insert frustrating amount) in rent each month! Why don’t I just own something and build equity, etc, etc…’

And that is a perfectly legitimate concern.  However, let’s take a look at this single line of reasoning with some objectivity.  **Note, numbers must be adjusted to specific cases – this exercise is merely to make a point:

Someone discovers that financing a $750,000 property at 4% over 30 yrs amounts to a fairly comparable monthly chomp--$3,600 versus $3,200 (lets ignore taxes for now).  Before you read on you must digest the fact that the value of a model is reliable in proportion to the value of assumptions.  Using linear projections, one’s instincts are to find a property up to the $750K threshold that wouldn’t make it embarrassing to justify to our cocktail-party-contenders that, “…no, I didn’t get ripped off…” 

Let’s think of just a few of the other “knobs”:

A.    Ownership is leverage.  The most robust characteristic of renting, and why you pay a premium to retain freedom is because you have increased the frequency of decision-making—whenever you renew a lease.  Make sure that your lifestyle, by which I mean job, will afford you the ability to leverage your time.

B.     The first-half of ownership feels more like renting anyhow.  It generally takes fifteen to twenty years (with one re-fi) to actually pay more on the principle component than the interest on even today’s cheaper mortgages.  In the above example, recognize that even though the “total cost” is fairly comparable, off by ~$10K, the total equity built is only $27K, or 4% of the value of the property.  So the effective or economic-rent are the numbers you see at the bottom.  In English: don’t buy a home without expectations to live there for at least eight to ten years.

C.     Measure the intangibles.  The truth is that the home decision drives and is-driven-by dozens of factors!  The best heuristic in my experience is to make the purchase after you know the constants in your life; don’t let the property be the dictator. 

Knowledge brings reassurance.  It’s worth a conversation to sit down with someone to review all of this.  Feel free to call me to discuss: 415-317-4546.