Somehow I’ve branded myself as the guy who thinks renting a home is better than buying one. So I expect to get some grief from a few people when I start shopping for a condo.
Am I finally giving in to the societal pressure? No.
Am I dying to receive a tax deduction that comes with a mortgage? Well, maybe a little, but that’s not a driving factor.
Listen up, Generation X (and you older millennial kids), and I’ll use my own experience to set the record straight on when buying makes more sense. It all boils down to costs and a little thing called commitment.
Why Renting Made Sense Before
The rent-by-choice community is exactly as it sounds. It consists of renters who have good reasons to rent, even though they could easily afford a down payment and the costs associated with home ownership. It’s also a group that’s growing like wildfire. Just drive around any popular beachside community to see the hundreds of luxury apartments that are popping up.
Conventional wisdom says that you’re throwing money away as a renter. This may be true if (a) you intend to stay in the place you own for a long time, and (b) you don’t want to invest in other high-return investments that need a large down payment.
In my case, for example, I had a high-return opportunity several years ago—an invitation to buy an ownership interest in Abacus. The expected return was far greater than more “traditional” investments like stock mutual funds and income-producing real estate. Risky? You bet—for a brief period I had most of my eggs in one basket (gulp). But for me, it was a calculated risk that made sense given my overall risk profile at the time (age, time horizon, job stability, etc.).
Professionals who are in the early phase of their careers, and who have a high tolerance and capacity for risk, may be better off renting so that they can keep their excess cash available for high-return pursuits. The more return you can get on money that would otherwise be used for a house down payment, the less it makes sense to own a house.
Why Owning Makes Sense Now
Going forward, saving my surplus income annually into more “traditional” and liquid investments puts me on track to meet my long-term life goals. So now owning a home may be the cheaper long-term option. If you play with a “rent versus own” calculator, take notice of how much less you’re able to spend on rent as you lower the expected investment return figure (this is the return that’s assumed on any surplus cash that exists directly as a result of being a renter). The calculator is essentially telling you that the lower return you achieve on your freed-up cash, the more it makes sense to buy.
Ready to Commit
Since I’m in a committed relationship with my career and company and have no plans to raise kids, it’s fair to say that I can commit to keeping a new house for at least a decade. As a rule of thumb, I think people should buy only if they are planning to stay in the house or condo for at least seven years. This hopefully allows for enough time to cover all of the transaction costs and broker commissions that result from buying/selling.
Doh! Where Are All the Houses?
Oh wait, scratch all that! I just searched on Redfin, and there are pretty much no homes matching my criteria (geographic location, price, size). The LA housing market is incredibly thin on inventory, so I guess I’ll be joining the “renting until there are condos available” club. My friends don’t consider me to be the most patient person, so wish me luck.