Home Buyer Tips: Your Best Investment

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Home Buyer Tips: Your Best Investment
Home buyer tips. When you are thinking about buying your next home, you need to figure out whether or not you're ready and if it will be your best investment.

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Each month, John Doe pays $2,000 to rent a townhouse in an affluent Calvert neighborhood. Although Doe could afford to buy a nice home, he doesn't want to. Why, he wonders, would you want to fritter away your cash in mortgage interest and property expenses when you can invest in the stock market?

It's a good question, especially considering that Doe's financial investments have returned an average of 20 per cent a year since 1982. But, while Doe's neighbors may regard his bulging stock portfolio with envy, few of them are ready to follow in his footsteps. As recent real estate boomlets in Calvert and surrounding counties have demonstrated, Marylander's still regard a home as their best investment. After all, conventional thinking has always insisted that renting is like burning money.

Our results show there is still a lot to be said for conventional wisdom. In general, owning your home offers greater rewards than renting -- but only if you are willing to stay put for the long haul and, once you've paid off your mortgage, invest your savings from home ownership.

The heart of the matter is how much you pay in rent versus how much you pay in shelter costs.
We're the first to admit that our results aren't clear cut. If you live in high-cost northern Calvert, renting still makes loads of sense. If you plan on moving frequently over the next 25 years, renting also wins out. But if you're an average Marylander, rooted in a typical town, buying a home can put you miles ahead of your renting counterpart.

The heart of the matter is how much you pay in rent versus how much you pay in shelter costs, including mortgage payments, property taxes, building insurance and maintenance expenses. A handy rule of thumb that emerged from our analysis is the 0.6 per cent rule: if you can rent a home for anything less than 0.6 per cent of its purchase price, you are likely to be further ahead as a renter; if your rent is above that 0.6 per cent level, the balance shifts in favor of owning.

By this standard, Doe is right to be renting. His townhouse is valued at $700,000, which makes his $3,500 monthly rent only 0.5 percent of the house price. Even if his investments were producing more modest returns than they have been, renting would probably still make sense for him.

What's surprising is that home ownership proves to be the superior strategy in these cities despite the generally modest forecasts for residential real estate. Most experts warn that house prices are more likely to crawl than soar over the next few decades.

That era was created because of the shortage of houses and the baby boomers. The number of 18 to 34 year-olds has decreased in Maryland every year this decade, reducing the supply of first-time buyers. Furthermore, when baby boomers begin dying out in 20 years, home prices may actually begin to decrease. Lawrence Jones, professor emeritus at the University of British Columbia's centre for Real Estate and Urban Land Economics, agrees: "I think it would be foolish to go into the housing market counting on getting lucky and having a 5 percent , 10 percent or 15 percent per annum return."

In the short term, renting always outpaces buying because land transfer taxes plus legal and closing fees are sunk into the initial purchase and have to be paid off over time.

So if home prices aren't going up quickly, what makes home owning so desirable? The answer lies in what happens to renters and homeowners over a few decades. Renters can expect to pay rents that will move upward at roughly the rate of inflation so their costs for accommodation never decrease in real terms. To make matters worse, they can't recover any portion of their costs -- once paid, their rent is gone.

In contrast, homeowners can expect to shell out less and less money in real terms, as mortgage payments and inflation reduce the amount of the principal they still owe. Over the long run, more and more of their monthly payments become recoverable since that money goes to pay down their principal and can be regained when the house is sold.

Remember, though, that we're talking about the long run. In the short term, renting always outpaces buying because land transfer taxes plus legal and closing fees are sunk into the initial purchase and have to be paid off over time. In just about any scenario we tried comparing renting with owning a home for less than five years, renters came out ahead.

The real advantage of home ownership only materializes if you plan on remaining in your home for a long time and if you invest the savings that result from home ownership. For example, our model suggests that if you buy a home in Maryland and don't invest what you save from renting over the next 25 years, you will wind up about $101,000 richer than if you had rented. But if you buy the house and invest your savings from home ownership over 25 years, you end up with $643,000 more in the bank than if you had spent those years as a tenant.

All of our number crunching goes to prove one point: when you buy, buy wisely. You can no longer afford to regard a home as your only investment. Nor can you afford to move every four to seven years -- as was the practice in previous decades -- without potentially negating any benefits of ownership. You should buy a house the same way you would any other investment -- with careful analysis, substantial market insight and a view to the long term.

Excerpt from story by Andrew Wahl

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