This week, The Money Guy Show hit the road! Brian visited with Bo up in Nashville, Tennessee and the guys kicked off the show by providing a great update on The Big Give.
When your Money Guys got down to business for this episode, the focus was on home ownership. They took a look at both sides of the “should you rent or buy” argument and discussed the pros and cons of each. Before jumping into the details, however, they went over a few things that could affect your view and place you on one side of this debate or the other.
Your age, your experience, and the way you view your money and your long-term goals can all impact whether you think it’s better to rent or buy. Brian and Bo got two big things straight right away, for everyone: there’s no one right answer for everyone’s situation, and you shouldn’t do anything that you can’t afford over the long term.
The Emotional Pull of Home Ownership
Brian explained that many of the decisions that go into home ownership are emotional ones. It’s extremely exciting to own your very own place, and that feeling of ownership isn’t something you get when you rent.
You also build strong memories that will last a lifetime when you buy a home and live in it for years. Each home you own becomes part of the fabric of your life, and that’s very meaningful for many people.
But there are downsides that the guys acknowledged. The most obvious: your costs often rise when you’re a homeowner, and home ownership can put more demand on your finances than some rental situations.
The Logical Argument for Renting
Bo expressed that he wasn’t so sure about the decision to buy over renting, and he explained some of the advantages to choosing to rent instead of purchase a home. At the top of the list: flexibility.
Renting allows you much more flexibility to change your living situation as you need to, whether it’s because of a change in your career, your finances, or because you simply wanted to move to a new location. When you buy a home, that’s not only a huge financial commitment. It’s a huge time commitment, too, as you should plan to live in the home for 5 to 7 years after purchase.
Whether it’s a good investment or a bad investment, real estate is always an illiquid investment that very few people can move quickly for a profit.
Bo also pointed out that renting means extremely low maintenance. Whenever anything goes awry, your landlord or property management company is just a phone call away. When you own a home, there’s no one to call — you (and your wallet) need to deal with maintenance and repairs yourself.
Financial Upsides to Home Ownership
Brian countered Bo’s points with a few logical ones of his own. He explained that there are a number of financial benefits to buying a home if you finances can get you into one, including:
- Tax advantages (like tax write offs and capital gains exemptions)
- The historic lows of mortgage interest rates
- The fact that real estate can be used as an inflation hedge and leverage to grow your wealth
Ultimately, if you purchase a house and plan to stay there for the long term, buying is a smart financial move.
Should You Rent or Buy?
As the guys stressed at the beginning of this episode, there’s no one right answer to whether you should rent or buy. The right decision is one you make for your situation after running the numbers and considering your long term goals. There are situations where it makes good financial sense to rent — and other times when it could pay off to buy.
If you do choose to buy, Brian and Bo provided a few tips to keep in mind:
- Try to keep all of your housing expenses under 30% of your income. Shoot for around 25% or less if possible.
- Remember the number-one rule of real estate: Location, Location, Location!
- You might not want to buy the most expensive house in the neighborhood. Getting in at a lower price provides a better opportunity for appreciation over time.
- Avoid homes that are too trendy and might be hard to resell. (You know how you can look at certain houses and know exactly what decade they were built in?)
And when it comes to down payments, know that lenders do like seeing 20% down. There are other options, but then you run into PMI which adds to your home ownership costs.
Finally, with interest rates at historic lows, a 30 year conventional mortgage may be the best bet for many — even if you like 15 year options. That’s because most mortgages do not have a prepayment penalty. Take advantage of today’s low interest rates and enjoy the flexibility a 30 year loan offers. You can pay extra when your finances can handle it, but you know you can always drop down to the normal monthly payment should life get in the way from time to time.