Spokane Housing Dilemma: Rent or Buy?
The decision of whether to rent or buy a home is a classic question that many individuals wrestle with as they navigate the complex landscape of finances and real estate. Real estate in Spokane has increased dramatically over the past ten years. Spokane has increased in size, drawing many people from larger cities like Seattle and California who can work remotely and pay cash for a much bigger home, increasing the price of homes. With rising housing prices and borrowing costs rising, it is difficult to determine whether to buy or rent. Renting and purchasing each comes with advantages and drawbacks, and the right choice often hinges on not only individual circumstances, financial aspirations, and lifestyle preferences but also what's happening in the economy.
Renting: Flexibility and Lower Initial Costs
1. Flexibility: Renting has a key advantage - flexibility. Compared to a mortgage's long-term commitment, rental agreements typically have shorter lease terms. Renting is a good option for people who anticipate changes in their living situation, such as career relocations or life transitions. It provides the freedom to move without being tied down to a property. For some, the opportunity to accept promotions and move outweighs the benefit of home equity.
2. Maintenance: Renters usually do not have to bear the cost and time of maintenance and repair expenses, as landlords are normally responsible for the upkeep of the property. This saves tenants from the financial implications and time-consuming tasks associated with home maintenance. Depending on the state, renters may have more rights and power than in other states. In Spokane, Washington, the law favors renters over landlords.
3. Lower Initial Costs: When it comes to renting, tenants are usually required to pay a security deposit and the first month's rent as upfront financial commitment. However, these costs are often lower than the substantial down payment and closing costs that are associated with buying a home. In comparison to a home's down payment, the difference is significant.
Buying: Equity Building and Stability
1. Equity Building: Owning a home has the benefit of allowing you to build equity over time. Every time you make a mortgage payment, you are contributing towards owning your property, which is like a form of savings. This equity can be used for different purposes by taking out a home equity loan or line of credit, providing you with financial flexibility.
2. Stability and Customization: Owning a home can provide a sense of stability and security, as homeowners have greater control over their living space and can personalize and modify it according to their preferences. This can be especially beneficial for those who wish to establish roots in a community or create a long-term living environment.
3. Potential Investment: Real estate can appreciate over time, making it a sound investment. Although market conditions can vary, the historical trend of real estate appreciation is an attractive factor for many prospective buyers. The potential to profit from the property's increasing value is a significant consideration for those who see homeownership as an investment opportunity.
Considerations for Both Options
1. Financial Situation: Before making a decision, it is crucial to conduct a thorough assessment of your financial situation. Your income, credit score, and existing debt are vital in determining affordability. Understanding your financial health is the first step in making an informed choice. A rule of thumb is that you shouldn't spend more than 28% of your gross income on the mortgage payment. This calculation isn't all encompassing and we'll cover whether or not it makes sense down below.
2. Market Conditions: Understanding the state of the real estate market is crucial when making a decision about buying or renting a home. When there is more housing inventory than demand, it is known as a buyer's market. This situation favors purchasing a home. Conversely, a competitive seller's market might make renting a more practical choice. By keeping track of current market conditions, individuals can make strategic decisions based on the prevailing trends.
3. Long-Term Plans: When deciding between renting and buying, it's important to consider your long-term plans. If you plan on staying in the same location for a prolonged period, homeownership may align with your goals. On the other hand, if flexibility and the potential for relocation are priorities for you, then renting might be the more suitable option.
How to calculate if buying makes sense
If personal preferences, financial circumstances, and future aspirations of an individual lead to buying a property, it may still be challenging to make that purchase possible. Let's consider a hypothetical scenario where Jack desires to buy a $300,000 home and wants to work in Spokane for a long time. I would evaluate his financial situation and other relevant factors to determine if he is capable of purchasing a property at this time. As a financial advisor, I help my clients in determining whether they should buy or wait through a cash flow analysis. I follow these steps:
Do you think he has enough money saved for both the downpayment and closing costs? There are two common scenarios: 5% or 20% down. If Jack puts down less than 20%, he'll have to pay for mortgage insurance, also known as PMI. If he has a high-paying job, contributes to a retirement plan, and can handle the extra payment in the short term, i'll suggest a 5% down payment instead of waiting until he can afford 20%. Jack can typically request to have this expense taken through the loan servicer when equity reaches 20% or when the loan is refinanced. Let's say he chooses a 5% down payment, which would be $15,000 in this case. Closing costs can vary, but they usually range between 2-5% of the loan amount. For a $285,000 home, Jack can expect to pay between $5,700-$14,250. Fortunately, Jack has $40,000 in his savings account, which is enough to cover the downpayment, closing costs of $29,250 and will be able to maintain an emergency fund of $10,750.
To determine how much you can afford to pay for your monthly home payment, you need to first calculate your monthly discretionary cash flow. This can be done by finding out how much money is left after all personal expenses are paid. You can check your savings at the beginning of every month to see how much is left over on a monthly basis. Exclude one-time purchases. For the sake of an example, let's say Jack's savings increase by an average of $700 each month. To figure out how much he can afford to pay for housing, we will add this amount to what he currently pays for rent and utilities, which is $2,300 ($2,000 for rent and $300 for utilities). Therefore, Jack can afford a total monthly home payment of $3,000.
We need to determine the total cost of housing. While mortgage lenders usually talk about the principal and interest associated with a monthly cost, other expenses contribute to the cost of owning a home. These expenses include utilities, mortgage payments, and maintenance. Utilities can be assumed to be the same, while maintenance typically amounts to 1% of the home value annually (approximately $250 per month), which includes savings to replace a roof. To calculate the total housing cost, I recommend using Zillow's calculator (https://www.zillow.com/) to obtain realistic estimates. Find a home for sale in a similar area and scroll down to the monthly payment calculator to get an idea of most expenses. Jack's monthly principal and interest payments will be $1,801 each month, assuming a 6.5% interest rate. Since Jack put in less than 20% for a downpayment, his mortgage payment will include Private Mortgage Insurance (PMI) at $181 per month. Other costs included in the monthly payment are property tax at $205 and home insurance at $105. Therefore, Jack's total home cost is $2,542 per month (Principal and Mortgage: $1,801, PMI: $181, Tax: $205, Insurance: $105, Maintenance: $250).
If your total monthly home payment is lower than what you can afford, and you have enough money saved for a down payment and closing costs, you should be in a good position. For instance, Jack's monthly home cost is $2,542, and he can cover it because he can afford up to $3,000, leaving him with some cushion. However, it's important to assess your financial situation and determine how much of a buffer you want between what you can handle and your total housing cost. Ideally, you should aim for at least a 10% buffer between what you can afford and your total housing cost.
If the current calculation doesn't make sense, it is important to reevaluate it. Certain aspects of this calculation might change over time, affecting the decision to buy a home. For example, if someone's income increases, they will be able to afford a more expensive home. Interest rates also fluctuate and can significantly impact the cost of the mortgage. Therefore, it is important to recalculate after a substantial change in the price of homes, income, or interest rates.
Warnings of buying
Don't wait for the housing market to dip before making a home purchase. The decision to buy a home should be based on having enough savings for a down payment, aligning with your financial plan, and having the necessary cash flow to cover the additional expenses of home ownership. If your finances are in order and everything else lines up, don't hesitate to make the purchase, even if the market isn't at its lowest point.
Warnings of renting
It's important to remember that buying a home shouldn't be forced. Don't wait around for the housing market to change before making a decision. If purchasing a home aligns with your financial plan, then go for it. On the other hand, there's no need to feel pressured by society to buy a home. Renting is also a valid choice with plenty of benefits. Owning a home isn't the only way to build wealth and achieve a successful retirement. Regardless of whether you choose to rent or buy, make sure you're putting money away for retirement. Be mindful of your spending habits and don't let renting stop you from saving for the future.
To wrap up
The decision to rent or buy a home is not straightforward and depends on several factors. Just like a Choose Your Own Adventure book, there is no one-size-fits-all answer. Your personal preferences, financial goals, and current life situation should guide your decision. It's important to carefully consider your personal goals and financial situation to determine what you can afford. Seek advice from a financial advisor, real estate professional, and accountant to make an informed decision and avoid any financial pitfalls that could impact your retirement goals. Happy house-hunting!
