For time immemorial, humans have strived to build safe communities for themselves and those they love. We establish permanent locations to fortify in order to explore the great world beyond, always with the security of a home to return to.
Whether the roof over our heads is our own or another’s, there is value in reliable protection from the elements. The question is, should you pay rent to a landlord, or be the lord of your land?
When considering if buying real estate is right for you, there are three major aspects of homeownership to consider: Mobility, Lifestyle, and Affordability.
The general rule of thumb dictates that you should rent if you believe you will move again in less than 5 years.
This rule is largely driven by the assumption that it will take 3 - 5 years to break-even when selling your home. Whether you are buying or selling, there are associated costs aside from the price of the property, and it will likely take several years for the property to appreciate enough in value to recuperate those costs.
Real estate profitability, however, is only part of the equation. Buying or selling a property is much more time-consuming and labor-intensive than renting.
Renting can be as quick as scanning online listings over an evening, spending an hour submitting a rental application, and touring while you wait for the landlord to run a background check. All said and done, you can have your new keys within a week.
Buying real estate can take weeks, months, or even years. Ignoring extreme cases, it’s safe to allocate a month for touring homes and another month for transferring ownership, totaling around two months before you have a new set of keys.
With all of the hurdles of transferring an immense asset like real estate, the stress may simply not be worth short term ownership.
Finally, nomads can reliably estimate their timeline when renting. With short timeframes for signing a new lease and a definitive termination for that lease, you can be on to the new adventure with minimal planning and minimal baggage.
Homeownership does not offer the same luxury. A buyer interested in your newly listed home may come along the same day the property hits the market or three months later. There are strategies to influence more buyers to take an interest in your home, most notably lowering the price, but there are no guaranteed timelines.
Renting is much faster and requires far less effort than buying or selling a property, lending itself beautifully for those who need to be light on their feet.
There are many perks to owning your home, but perhaps the most fun is the freedom to make changes. You control every aspect of the space you live in, from remodeling to gardening, to maintenance.
Homeownership gives you a whole new platform to express yourself and create joy with personal touches.
Want to adopt a dog? Adopt a dog! Want to change the paint colors? Knock yourself out! Have a drafty window? Fix it the right way!
When we rent, we have to live by somebody else’s rules. Rules that are intended to first, make the landlord as much money as possible, and second, protect their investment.
The challenging reality is that ethical, empathetic, and reliable landlords are not guaranteed. The freedom of control can be priceless.
That being said, there are certainly folks who want to be free from the burden of responsibility. When a critical, and often expensive, maintenance project rears its head, your landlord is on the hook for dealing with it.
You will have to decide if relinquishing control is worth the reduced responsibility found in renting.
Another point to consider is the stability in owning your home. When you are in the driver’s seat, there are variables that you now control.
For example, most home loans are set at fixed amounts. You will pay the same amount of money to the bank next month as you will pay in 20 years.
The same can’t be said for renting. Your landlord has the right to raise your rent every time your lease is renewed.
This is of course assuming your landlord chooses to renew your lease. They may decide it is time for you to move out, and you will have to begin the moving process all over again.
There is peace of mind in knowing the roof over your head will be there for as long as you want it to be.
The most important aspect to consider here is the style of life you want to lead.
Do you need a backyard? Do you want a short commute? Do you want to live close to family?
In major metropolitan markets like Los Angeles, it is simply less expensive to rent than to own.
Your unique requirements for housing may price you out of homeownership.
However, what you lose in control and real estate investment opportunities, you gain a better quality of life that is otherwise out of reach.
With US housing prices outpacing wage growth, our ability to afford a home is much more difficult today than it was 50 years ago.
In Los Angeles, the average home costs $794,000. Woah!
If this number feels astronomically out of reach, you aren’t alone. According to the National Association of Realtors’ 2020 Profile of Home Buyers and Sellers, 92% of all buyers used a fixed-rate mortgage to purchase their home.
Conventional advice dictates we should have 20% of the home value saved to put towards the down payment when purchasing. Given Los Angeles’ average home price, one would need $158,800 in cash for the down payment.
Fortunately, there are several very popular lending programs that only require you to have 3% of the home’s value saved. There are tradeoffs and requirements, but you could start searching for an average priced home with only $24,000 in savings.
Saving enough money is a major obstacle for most homebuyers, but this only opens the door.
There are two other major financial data points that you will have to share with your lender.
First is your credit score. This is an indication of how responsibly you have managed debt in the past, and therefore how likely you are to successfully pay off future debt.
If your credit score is low, lenders will be too nervous to help you buy a property. After all, if you have thousands of dollars in credit card debt and late payments on your car loan, there’s a good chance you will not be able to afford the additional burden of a home loan.
For the popular FHA Loan, you can have as low as a 500 credit score. However, higher scores will earn you lower interest rates and less demanding down payments.
The second is your debt-to-income (DTI) ratio. This is simply a percentage that compares how much you owe to how much you earn in a given month.
You can calculate your DTI ratio by adding up all of your monthly debts, such as, minimum credit card payments, car payments, and student loans, and dividing it by your pre-tax income.
In an effort to protect you and themselves, lenders want to make sure you can afford the necessities of life without throwing every dollar you have at a mortgage payment.
Lenders will want to see a DTI ratio no higher than 36% after taking into account the new home loan. In high cost of living areas like Los Angeles, your DTI can be slightly higher.
The final big question is; how much do you feel comfortable paying for housing every single month?
Just because the bank will loan you a certain amount of money doesn’t mean you should take all of it.
You not only have your mortgage, but also taxes, insurance, utilities, maintenance, and other expenses. Take the time to chat with your lender and real estate agent to draft a more accurate estimate of your monthly payments.
Wrapping It Up
Owning your home is an incredible financial achievement and thrilling addition to your life. You become embedded in your community, you have the freedom to make a house your home, and historically real estate has been an amazing investment.
However, tethering yourself to a single location, adding additional and costly responsibilities to your life, and taking on hundreds of thousands of dollars of new debt can be an overwhelming proposition.
Homeownership is certainly not for everybody, but for those who aspire to call the roof overhead their own, it may be more within reach than you anticipated.
Bottom line: If you can afford the down payment for a home in an appreciating market and plan on holding onto it for at least 5 years, it’s a good time to buy.
If you have questions or want to chat about whether now is a good time to buy, reach out! I am always happy to help you build a plan and weigh priorities.