Few months ago, I wrote a series of posts called: 7 Tactics to Financial Liberty. I thought it would be a good idea to share my own four investing rules. I’m no investment whiz or a financial advisor, in fact I’m far from both. So, these rules are my own and that I run my finances around. These rules definitely work for me, and they might work for you too. I will post 1 to 2 investing rules per week with the intention of not dragging it out for a long time and keeping this as simple as possible.
Rule # 1: Better To Be A Home Owner Versus Renting
Real Estate was my first investment. I purchased my first home in the summer of 2009. When everyone was switching to renting, unsure about Real Estate and sticking to renting, I opted to become a homeowner. Owning a home made sense for me at the time of my purchase. Canada was still in recession mode, interest rates were dirt cheap and homes were selling for a little less than usual. Even three years later, I’m glad that I purchased my first home. Home ownership has been everything that I hoped for when I became a home owner. In three years, I’ve accumulated roughly $35,000 in equity (this is clean, after realtor fees and lawyer fees. So, of course it made sense for me to purchase. Like any other home owner, the number one goal is to build equity. I’ve built mine in a short period of time and still continue to do so.
Growing up I watched my parents build equity in every property they owned. Later, they would sell these properties and earn quality return on their home ownership investment. In each property, they would stay anywhere between five to seven years, eventually sell and move to a bigger home or a better community. Each move was calculated and all the moves paid off.
They are on their third home now and have less than $100K left owing on their current mortgage. Figuratively speaking, they have roughly $350,000 of equity in the home.
Real Estate is NOT Bulletproof
Nothing is bulletproof and that includes Real Estate. Like any other investment, Real Estate comes with risk. Think back to 2008. Real Estate tanked across United States. Canada caught a minor cold. Despite that this occurred almost four years ago, Real Estate in United States is still reeling from the 2008 recession, just ask those living in Florida, Nevada and Arizona.
Fortunately Real Estate market is more stable than the stock market. However, nothing is bulletproof, so it doesn’t mean value cannot drop.
Home ownership is not for everyone
Much like any other investing, it comes down to your psychological thought. Real Estate is no different. Home ownership is not for everyone. Not everyone likes being tied down. Not everyone has a minimum down payment saved. Others like to move frequently. Some of us don’t want to live in certain parts of the city and affordability is out of question in the desired area we want to live in.
When I purchased my home, ideally I wanted to live in downtown Toronto. Reality was different. I couldn’t afford a home in downtown Toronto. So, I settled outside the city. I’m happy with the choice now. It worked out for the better. My job is relatively close (20km one way), and I’m close to family and friends.
Affordability Check
Can you afford to be a home owner? How much can you afford? These are some of the questions that every homeowner faces. The key to home ownership is buying what you can afford. A simple way to do your own affordability check: Total up all your monthly debt payments including rent, add your expected monthly share of property taxes and heating, and then see what percentage of your monthly pre-tax household income it amounts to.
Don’t try to be the champ by becoming someone who justifies buying something they can’t afford because they’re afraid it could get more expensive tomorrow. There will always be Real Estate to purchase. One door closes, another one opens.
If you can’t afford something, than renting comes in. No, it’s not an ideal permanent solution unless you foresee the kind of housing market collapse the U.S. market is going through right now.
Renting temporarily offers a way to bide your time while building up your savings. It costs less (sometimes) to rent than own, which means you can write your monthly rent cheque and then bank the money a homeowner would be paying for property taxes, upkeep and maintenance fees.
If you are looking at purchasing a home, check out these two calculators to see how much you can afford:
The Ultimate Buy vs Rent Calculator
Bottom Line: Renting is better off long term
It ultimately is where do you want to live and what are you willing to pay to live there. If it drives you nuts having to get the landlord’s permission to paint your bedroom, or getting a rent increase every year, you might be better off as a homeowner. If you like to move every 2 years or want to live in a cheap accommodation, renting might be better for you.
There are positive and negative arguments of home ownership. Same could be said about renting. Home ownership makes sense for me presently. I worked out the numbers. A two bedroom condo rents for $1,100 per month in my area. I pay $1,200 per month for my two bedroom condo and this includes my mortgage, maintenance fee and property tax. For an extra $100 per month, I’m happy to be a homeowner. I have something to call my own (even though it’s still owned by the bank) and I can paint my rooms any colour I desire.
Finally, I enjoy building up an equity. As you seen above, I’ve been able to build a decent equity in a short period of time. The downside to me being a homeowner, is that I’m tied down to paying my mortgage, at least for another two years. In two years I could sell, take the cash (equity) and become a renter.
My other option is to re-invest my equity and purchase another home. There are definitely a few options and I like options - options are good.
Are you a home owner or renter? And why?
Eddie
I am an involuntary renter – a rent slave. Renting is fine and even preferable at some stages of life, but it completely sucks to never be able to buy a home. In my area, a current estimate suggests renting is 18 percent more expensive than owning. Renters are at risk of becoming a permanent underclass unable to buy homes and thus relegated to not only never being able to stabilize long-term housing costs, and never building any equity, but also paying a premium for the “privilege” of never being able to buy a home.
It would be great if I had the opportunity to buy a home I could afford, but homes I can afford to buy are not allowed (e.g. minimum lot sizes make even the most modest house out of reach).
I am a homeowner. I didn’t really decide to buy a home because of the investment opportunity. I just wanted my own place to live, where I could do what I wanted.
Over 15 years ago (when I bought my first house) interest rates were higher. It wasn’t cheaper to buy than rent. It was about $200 more a month. That’s not including what we had to spend to maintain/improve our house. Even though it was a new home it required upkeep and there were improvements we did like painting, putting up a fence, paving the driveway etc. It was worth it to me to pay the extra money to have our own place.
Now I have been a homeowner for over 15 years, our mortgage and taxes are much, much less than what it would cost to rent a house this size. While rents have risen, our mortgage payment has actually went down because interest rates have dropped. We have quite a bit of equity in our home due to paying down the mortgage and rise in value. In 4 years our mortgage will be completely paid off.
While it has worked out for us, after watching the meltdown in the real estate market in the States I don’t believe real estate is a sure thing anymore. I would caution people who are getting into the real estate market because they want to make money. My sister in Texas owns 2 homes. One is worth less than she paid for it. The other she has owned for 15 years and it is only worth about $30,000 more than she paid for it (if she could sell it at all). I think people should buy a home because they want a nice place to live. If they make money in the process, that would be a bonus.
Carrie recently posted..Making Meal Starters
For me, buying a house is my better option. Instead of paying rent which will just go to the landlord, probably to pay his mortgage, I will buy a house instead and use that rent money to pay my monthly mortgage.
Marissa@ 2nd Skies Forex recently posted..Forex Price Action Setups (NY Close) May 9th
i strongly agree with your rule# 1it really is good idea to buy a home rather than to be on rent..coz that feel of being an owner of a place even if its too small is just amazing…..you feel so secure!! and yes you ave a lot of money too;)