Renting vs Buying – Your Break Even Point Is Sooner Than You Think

Renting vs Buying – Your Break Even Point Is Sooner Than You Think

Anything you think is in your way can be removed if you really want to become a homeowner.  In fact, you’ll find out that some commonly perceived roadblocks are only myths, and don’t need to delay your dreams anymore. If you are hesitant about moving forward, my 5-week series is just for you — The 5 Most Common Myths BUSTED About the Best Time to Buy Your First Home.

This week you will see that continuing to rent isn’t always the safe or better decision, and that buying that home sooner may actually be the right choice for you.

Myth:  My life is in flux so I shouldn’t buy.  I’m not sure if I’ll be in this location for long. What if I meet someone, get a different job, and my life changes? It’s better if I wait to figure all that out first.

Truth: You don’t have to live in your first home forever for it to still be a good idea. You can still get the benefits of owning a home—tax deductions and equity instead of throwing your money away in rent.

Many potential buyers aren’t sure if they are ready to settle down permanently and commit to owning a home. Buying a home looks like a huge financial leap and they don’t want any regrets, especially if their life isn’t predictable.

Continuing to rent seems like a better financial decision to them, and waiting for the “perfect time” to buy their first home seems like the responsible thing to do.

This article is about to bust that myth!

You can stop waiting (and waiting!) and buy sooner than you think even if you plan to be in your home for just a few years.

First off, you don’t need to live in your first home forever. In fact it could be the best stepping stone to your next home, bringing you even more financial security and the cash for that dream home.

Let’s take a look at certain factors that will show why owning your home doesn’t have to be as far off as you think, and it could be a safer and more sound financial decision for many of you.

Cost of Renting vs Buying

If you’re at a standstill trying to determine the answer to renting vs buying, then it’s important to learn about the break-even horizon, or how many years it will take before the cost of buying equals the cost of renting.

Take a look at our rent vs buy calculator —  you can put in your down payment, purchase price, and what you currently pay in rent to see the advantage of buying year after year.  It’s such a cool tool! 

Rents have increased year over year in MD, DC, and VA, so homeownership can still be beneficial even with the average 30 year interest rates in the high 5’s. It’s a combination that can make buying a home more affordable and a better decision financially; especially when adding any equity you will gain in your home.

Making the Right Decision

That’s why buying could be a better decision for you than renting if you plan to stay in the area for more several years. Not building equity in your own home and using your money for rent could be a wasted financial opportunity for you.

However, you should always consider the neighborhood, your mortgage, and personal factors before making a final decision when comparing renting to buying.

I tell clients to ask themselves certain questions about their goals and plans. What part of life are you in? How long do you want to be in this first home? Is it for a few years until you have kids, or is this the home you are going to send your kids to college in? 

Your answers will help you decide if you should move forward with buying, and even what type of first home you should look for depending on your budget.

Let’s Break It Down

What about once you buy a home — how long do you need to live it in before you break even?

Everyone would like to make a profit or break even — not lose money — on their home when it comes time to sell it.

A true “break-even point” is not simply what you originally paid for a home. It’s more complicated than that.

This figure also includes the costs associated with buying and owning, tax benefits you’ve taken advantage of during your ownership and then the cost of selling your home.

You also need to factor in the equity you’ve gained in your home and also any appreciation in its value since your purchase date.

To determine how long you need to hold onto your home, you’ll need to calculate the break-even sales price by adding up your complete expenses for buying and selling a home.

Determine your “expenses”:

• First, pull together the total expenses for your home purchase — original purchase price plus closing costs.
• Next, calculate the costs of owning your home — repairs, maintenance and any upgrades.
• Then, figure out the cost of selling your home. Generally speaking you will need to estimate about 6-7% of the selling price — includes commissions for each agent, sales taxes, and attorney fees.

Now determine any potential “income”:

• Consider the equity in your home (principal paid toward your mortgage).
• Don’t forget about the tax refunds you may receive while owning as well.
• Plus, include any increase in appreciation.

Once you have the figures above, you’ll be able to determine when it makes financial sense for you to sell your home.

Appreciation and Equity – A Homeowner’s Dream

Every buyer wants to build equity in their home and also own a home that appreciates in value. These two factors can help you get to your break-even point sooner or allow you to make a profit on the sale of your home.

Equity = ownership. The more equity you have, the more home you actually own.  You gain equity when you pay down the principal of your loan.

One reason the “five-year rule” exists is that it takes time to build equity when you have a mortgage. In the first few years of your mortgage, more of your monthly payment goes toward the interest on the loan and less goes toward the principal. So you’re not really building much equity early on.

As more time goes by your principal slowly goes down, causing your interest payments to be less, and that’s when more of your payment will go toward your principal. With lower interest rates, it’s making it less costly to pay down your loan!

Appreciation = value gained. Your home’s value will hopefully increase in value over time. You might also do improvements to the property to increase its value more quickly.

In a perfect market, the longer you live in your home, the more it will appreciate in value. That is why you’re encouraged to live in your home for at least five years to reap this gain.

However, the housing market can be unpredictable – homes can quickly appreciate in value or it can be a bust, leaving you with a home underwater.

Smart Strategies When Buying

So what can you do to protect yourself and hopefully break even or make a profit on your home? 

Here are some strategies to keep in mind to speed up your break-even timeframe or make your homeownership a financial plus for you.

Consider how location can impact appreciation

• Pick the right location. This has a HUGE impact on your home’s appreciation. Think carefully about the neighborhood, street, and community of your home. Is it an up and coming neighborhood or one going the opposite way?  Always think about possible resale value before you purchase.
• Avoid buying the best home on the street. This type of home may never appreciate as much as you would like because of the surrounding homes (which benefit from yours!).
• Look at appreciation values over several years for a neighborhood to get a sense of its stability and long-term patterns. Are home prices rising? Are condo units in the building gaining value? You can find out the average appreciation rate from your realtor.
• Make improvements to the property. But be careful not to over improve or you may be lose money!

Consider the right mortgage now for future goals

• Avoid having a large mortgage. Don’t overspend on your first home since it affects your ability to buy your next home. If you can’t put down a large down payment, then consider buying a home where you can afford a smaller loan.
• Qualify for a low interest rate. The lower your mortgage rate, the less you’ll pay toward the interest and the sooner you’ll “be owning” your home. We can explore options with discount points with you.
• Consider PMI. You can pay mortgage insurance within your monthly payment, all at once at closing, or you can build it into the interest rate. We can help you understand which will save you the most money based on the timeframe you plan to own the home.

As you can see, buying could be a better decision for many of you than continuing to rent, and to wait and wait for that perfect time. You can move forward sooner than you think, and still do it in a responsible and smart way that will bring you financial security.

Turn Your First Home Into Your First Rental Property

If you decide to move sooner than your break-even point or your life changes for whatever reason, you could consider turning your first home into your first rental home.

It could become a great investment property where you could reap even more financial rewards from this home.

In fact, next week’s topic covers this in more detail – The Benefits of an Investment Property. It’s another myth I bust about needing to live in your home for many years to benefit from your purchase.

If you have any questions about anything we covered, let us know!