Should I rent or buy?
Unfortunately, we can’t look into the future and know for sure what the right decision is. But, we can take a logical look at a few important factors:
- How long you plan to stay. The longer you stay, the greater the benefit of buying over renting.
Risk. Buying makes more sense for people who have the financial security to sit through a drop in home prices and deal with the cost of home repairs. A rule of thumb is that you should budget about 1% of your purchase price for home maintenance per year.
Finances. How much you can afford on a monthly basis and how much you have for a down payment are huge factors in whether or not you should buy.
Taxes. When you own a home, you get deductions on your taxes that renters don’t get. You can do quick math to see that even if you pay more monthly for a mortgage, it’s probably pretty close to what you’d pay for rent once you factor in your tax deductions.
Interest rates. Right now, they’re still pretty low. People in my parents’ generation talk about buying their first homes with 15% interest!
This article in the OC Register talks about these factors in more detail.
What questions should I ask before I sign a lease?
First and foremost, you’ll want to ask about rent–not only how much it is at the time of signing, but what are the typical annual increases. You should also ask if utilities are included. If they’re not, how much are they? You’ll want to ask about the security deposit, pet policy, renter’s insurance (sometimes required, sometimes not), and amenities like parking spaces and laundry facilities.
Should I rent out my property?
There are different factors to consider when it comes to renting out a property. In many cases, rent paid can cover the mortgage (and, ideally, property taxes and some other expenses related to the property, like gardening, pool service, etc). But, even if you break even, owning a rental property can still be a great option. After all, there are tax benefits. In the eyes of the IRS, that property is its own little business. Yes, you have to declare the income, obviously, but you can also write off expenses you have on the property. Plus, consider that the property has a good chance of appreciating in value over time. While the market has plateaued a bit, the big picture shows gains. Even if are in the red a bit on a rental property, the long-term appreciation may make it worth hanging onto.
Of course, like most investments, there can be downsides to income properties, too. They are considered “concentrated investments,” meaning you’ve got a lot of eggs in one basket. And they are “illiquid,” meaning you can’t get your money out quickly. On paper, you have this 400K asset, for example, but you can’t access that as real money overnight. And, by owning an income property, you find yourself in a new role–landlord. Dealing with tenants can be a really great experience, or a really tumultuous one. My in-laws always tell the story of the couple who refused to pay rent and, when finally evicted, they squeezed honey all around the borders of the house to draw in ants. It worked. There were lots of ants.
If you’re hesitant about being a landlord, there are property management companies that will oversee your property for you at a cost of about 8% to 10% of the monthly rent. They’ll collect rent checks and field calls about backed up toilets so you don’t have to. Property managers are not only convenient but essential if you live far away from your rental property.
Keep in mind, your property may make a great vacation rental. There are companies that specialize just in vacation rentals and they will be able to tell you how much your home would go for per night (it usually varies depending on season). They will collect a percentage fee to market your home and manage the tenants. Sometimes, you can collect the same cash in one week as you would in a month from a tenant on an annual lease. But, you also run the risk of not having renters for weeks or months at a time, depending on demand in your area.
Still have questions? That’s what I’m here for. Contact me today!
The information contained herein has been obtained through sources deemed reliable but cannot be guaranteed as to its accuracy. Any information of special interest should be obtained through independent verification.