Over the past few decades the answer to this question seemed like an easy one, save for a down payment and buy a house. The move from renting to buying should be quick so you can start paying yourself and stop throwing away all that money in rent. After all, isn’t buying a home one of the best ways to build wealth? Absolutely, but be careful to choose a home you can afford and carefully evaluate your financial situation for at least the next 3-5 years before jumping into home ownership.
A house is a great investment if you are spending 35% or less of your take home income on housing expenses. This includes mortgage payments, insurance, property tax, home maintenance, utilities, etc. Spending more than 35% of your income on housing costs can leave you house poor and you may have to cancel those annual summer vacations or find other important areas of your life to cut back on. Many Canadians have been spending as much as 50% on their homes and some even as much as 50% just on their mortgage payments. Canadians have never been more indebted (mostly from mortgage debt) and it is more important than ever to choose a home that is affordable for you.
If you are young, single and just starting a new job or maybe you just moved to a new city or town, renting for a year or two before buying may be a great option. It allows time to determine if this is the place for you and gives time to save for a down payment. Buying a home and selling it again quickly in a flat market can end up costing a lot more than renting and can be much more stressful than just having to give your 2 months notice.
When looking at renting vs. buying, some quick math can help with your decision.
If the home price is more than 200 times the monthly rent, than financially it may be better to rent. For example, if you are able to rent a house for $1000 per month and this house would cost $250,000 to buy, you are better off financially (in the short term anyway) to be renting. If your $1000 per month in rent was only getting you into a $150,000 house, then you may be better off buying.
If you plan on living in the same town for at least the next 3-5 years or longer, buying is usually a great option. There is a sense of pride and families with children usually prefer the stability of home ownership. Owning real estate over longer periods of time like 5, 10 or 15 years, you can expect to see even greater appreciation in the value of your home while at the same time your outstanding mortgage balance is getting lower and lower.
Many in today’s society have bought into the idea that bigger is better. I see many walk-in closets in today’s homes that are bigger than bedrooms in our grandparent’s homes. People want bigger and bigger houses and with this come bigger expenses and less affordability. Don’t get caught up in the idea of needing the biggest and best home. If you are buying, my argument is to find a modest home that is affordable and stick to keeping your housing costs at 35% or less of your take home pay.
Richard H. Butt is Broker/Owner & REALTOR® at Newfoundland Island Realty in Corner Brook. He has been in the real estate business since 2006 and helping his clients achieve their real estate dreams is his passion. Find Richard online at www.nlislandrealty.com or call 709.639.7368.