Updated: Dec 4, 2020
We covering the “American Dream” and aspects of buying or renting a home and where is society heading?
The goal in today’s podcast is to identify the expenses, gains and opportunity cost that align with the lifestyle you desire and at the same token to be to build a solid financial plan and long term investments.
In today’s economy, where we find ourselves renting more than buying in the United States, which is increasing due to the millennials choosing to rent as we see more and more nomad style living. The notion of wanting to go whenever wherever has increased in the last few years, as well as the need for freedom from leases that can tie you down, especially for individuals that love to live the nomadic lifestyle and can work remotely anywhere which is the new way of working and living that allowed us this freedom from the old ways of showing up to work.
We also found co-living establishments offering an array of choices when it comes to the comfort of one's lifestyle. I will never forget the 3 months I took two years ago, to live in Lisbon while working on my second business, I could honestly write a book about the experience and how it has impacted me up to today and how I operate my business and see opportunity.
The nomadic lifestyle is growing so rapidly that long term leases will eventually be a sign of the old.
Buying a home is known as the American Dream, the white picket fence, the dog and the smell of baked cookies in the oven. However, there are a lot of factors to take into place when purchasing a home as well as doing our research and being able to identify all invisible cost - this phantom cost also needs to be factored into your calculation if purchasing a home and if best suited to your current or longterm needs.
Here are 8 steps for best decision making when purchasing or renting a home.
#1 Some factors to take into account when buying a home is to be sure that your lifestyle and location really line up with your dream home - For instance, If you live in Santa Monica, and love being by the ocean, (location), and your lifestyle is you love walking to work, coffee shop, or lunch at the corner restaurant, or even jumping into an Uber to meet a friend a few blocks away (well, when COVID) wasn’t a thing. You get my point.
Now if I love Santa Monica and love the walking lifestyle, but cannot afford to purchase a home in Santa Monica, then purchasing a home in BFE, to “live the American dream” of owning a house, just to own a house, will most likely make you feel unbalanced, unfulfilled and lonely as you will most likely lose the view of the ocean, and the vibe of the Santa Monica lifestyle you love so much. This is called an opportunity cost - giving up something for something else… so be clear on why you want to purchase a house and what rewards owning a home will give you both intrinsically and financially.
Really knowing and understanding your lifestyle needs allowing you to really align your joy, happiness and goals in the long run. Mis-alignment of your lifestyle will leave you unfulfilled.
That is number one, knowing where you love to live (location, and Lifestyle needs).
#2 Second would cost, renting vs buying is a question I get asked frequently, why? Because we all have this notion that purchasing a house is a lot smarter and (only the savviest people with good financial practices get to participate in) well not so fast.
Purchasing a home is a huge financial decision, that one should not take lightly.
We also shouldn’t make the assumption, that if my rent is $3000, then I could afford a house that cost $3000 - That type of thinking will get you in financial doo-doo and shows you have NOT done your due diligence in accounting for the phantom cost and other related expectations of owning a home or rent for that matter.
When you rent, most of all the repairs and maintenance in the house get completed by your landlord, so that wouldn’t be an extra cost to you. When you buy a home, guess what, now you have to dip into your emergency fund to pay for those repairs (this is, of course, assuming you have a min of 8-12 month emergency fund.
Also, when you rent, you are not likely to pay for a Gardner, pool man, and some utilities are included with your rent making your rent affordable.
When you purchase you have to take into considerations the maintenance cost of keeping up with your property. Such as Gardner, pool man, pest control, if and equipment and supplies to maintain your property.
#3 The additional cost is property taxes, which you have to pay when you own, and when you rent those fees are most likely factored into your monthly rent payment.
#4 There is also PMI - which if you do not know what PMI is, you are most likely not ready to purchase a house, as doing your homework should be the first step to take to ensure you are getting yourself in a safe financial situation.
PMI stands for Private Mortgage Insurance (double-check this) - in other words, it is a cost that mortgage companies will tackle onto your mortgage payment if you do not have the 20% down payment to put upfront. They basically will incur this cost until 20% has been met.
In addition, if you do not have the 20% to put down on a home, you are not likely to be ready to purchase a house. Again a home is a huge investment, and should not be treated lightly. This is a long term financial commitment.
The more you know the ins and outs of purchasing a home the better you will make sound decision for yourself and your long term financial goals.
#5 Purchasing a house can be very exciting and extremely rewarding, and the one tip I can give you is if you decide after doing all the calculations that purchasing a home is your best financial outlet when being sure you are purchasing a home you can see yourself living there for at least 5-10 years, even if you choose to live there only 2 years to avoid paying capital gains.
I purchased my first property when I was 18 years old with 10K that my grandmother gave me. At 18, I could have done a number of things with that money, travels, purchased a car, invested it in the market, spent it on clothes and shoes… but I decided I wanted to purchase a condo and have a home for security. That was one of the best decisions for me at the time, because I remodeled some of the interiors when I lived in my condo, and sold it two years later for a profit, then rolled over that profit into the next property which was slightly larger and by the university where I was attending and did the same thing. So, I was able to not only set myself up for financial success, but I was also adding value to the home by adding features, that would in term give me a better return on my investment - known as ROI.
Now, did I plan this, no I was 18 - but as the time went on, I found myself pretty good at interior design, and building a nice side hustle that allowed me to really live the lifestyle I wanted without feeling depleted.
At the time, I was a full-time corporate accountant working for a Fortune 500 company, so I had to do this in my spare time, which added so much value to my life.
So the more clear you are about why you would like to purchase a home or stay renting is going to be beneficial to you in the moment or long term.
#6 Another aspect to consider that purchasing a home are taxable benefits.
As you prepare your financial property audit and crunch those numbers,
You will find that in most states you deduct Interest Income on your taxes and when you rent you cannot.
Interest Income if the State of CA is up to 10K per year maximum.
If you are self-employed, you can also deduct a % of your home expenses (rent, utilities, etc) as part of your business.
But how much is the question I get asked frequently-
Well, reach out to your accountant and they will be able to give you that information, even if it is an estimate as it would depend on the usage of space.
#7 If you decide to purchase a home, know the type of mortgage loan you want and would be qualified to carry.
In our current conditions interest rates are extremely low, and there are opportunities to get a loan at a very low-interest rate, but the question to ask is 1) how long is the loan for? 15 Years, 30 years, etc… and 2) Is the loan principal and interest or interest-only loan? This will play a huge factor on the end goal, and what the property will be worth in the future. Take into consideration inflation as well.
#8 If you google, mortgage calculator, it will give you an average mortgage payment/cost. Once you figured that amount out, you can add on your utilities, property tax, PMI, and other repairs/maintenance expenses to give you an overview of your full financial cost.
Lastly, be clear on your opportunity cost of renting vs purchasing would be and the alignment with your lifestyle needs and long term goals.