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.
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:
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?