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To buy or not to buy?

Posted: February 5th, 2016 | Columnists, Featured, Financial News | No Comments

The pros (and cons) in San Diego

By Taylor Schulte | Financial News

A 2015 study released by Zillow shows that San Diego currently has one of the worst housing markets in the nation, with inventory down 30 percent year-over-year, and the fourth highest median price in the nation at $528,000. While the market is seemingly in the seller’s favor, many opt to buy regardless of the housing market — be it for stability, tax benefits or something else altogether.

Taylor Schulte

Taylor Schulte

As a financial planner, I often find myself discussing real estate and its impacts on one’s financial future. And while there are plenty of reasons to buy, there are also a number arguments that support renting. Below are a few considerations to keep in mind when faced with that decision.

Why buy?

Sure, the market isn’t ideal. In fact, it’s one of the worst in the nation. So why are some people opting to buy now?

  1. A home provides a place to live — stability for you and your family. When you own a home, you are no longer at the mercy of a landlord who changes his/her terms or, even worse, sells the property. There is also something to be said about making that payment and knowing that with each payment you are closer to owning that asset.
  2. No Surprises. While you can certainly be caught off guard by a leaky roof or a broken water heater, your monthly payment typically will not vary, so you can plan ahead. This helps with budgeting, cash flow and other aspects of a comprehensive financial plan.
  3. Tax Benefits. Tax breaks from home ownership can be significant. As a homeowner, you are able to deduct many home-related expenses. And, unless you owe more than $1 million, all the interest you pay in your mortgage payment is tax deductible.
  4. While real estate hasn’t been proven to be the best investment over a long period of time, barely keeping up with inflation, it can serve as a great diversification tool. Consumers commonly invest in stocks, bonds, cash, CDs, etc., through their brokerage and retirement accounts. Real estate is another asset class that can help diversify your investable assets. Plus, as a tangible asset, real estate appeals to many. The key is to diversify and avoid investing solely in real estate.
  5. Building Equity and Retirement Planning. As a homeowner, you get to build up your equity by paying down the mortgage over the years. If you are successful in paying down your mortgage, you will likely have a lower cost of living in retirement. 

Opting to rent

While buying a home certainly has its advantages, renting often works better for many. So, if you are in that part of the population who is unable to buy at this time, here are a few good reasons to rent:

  1. While some people spend most of their lives in one location, there are many who prefer to move around, experience new neighborhoods, cities, etc. It’s hard to put a dollar value on that experience and enjoyment. The same goes for one’s career — if you are anticipating a change, it may be best to rent, as buying a home can hinder that flexibility to pick up and move.
  2. Skip out on home ownership costs. Homeowners are painfully familiar with the extra and unforeseen costs that come with purchasing and maintaining a home. These include realtor costs, mortgage origination fees, property taxes, HOA fees (if applicable), moving costs, furnishing, decorating, leaky pipes, gardener, you name it. Often times, these costs are higher than people anticipate. As a tenant, you can enjoy the perks of your abode, without having to worry about the financial burden of those transactional and ongoing expenses.
  3. For obvious reasons, a house isn’t something that can generally be turned into cash overnight. Many people invest their life savings into a home, thus putting the bulk of their net worth into an illiquid asset. While there can certainly be benefits to not cashing in on our savings, there is also a risk that comes with tying up a large portion of your wealth into such an asset. Renting allows for flexibility and other investment options for your assets.
  4. Building Credit. As consumers, we need a healthy credit for pretty much all we do — getting a new cell phone plan, buying a car, a home or even renting. While renting doesn’t boost credit the same way owning a home often can, creating a history of on-time rental payments can, in some cases, help build your credit to qualify for a mortgage down the road. This history can be created when (and if) your landlord reports your payment data to the credit agencies. Alternatively, there are several third-party services that can help report this information on your behalf. Once your credit is in a good place, you can reevaluate and see if owning a home is right for you.

—Taylor Schulte, CFP, is the founder of Define Financial in Downtown San Diego. He specializes in providing independent, objective, financial advice to individuals, families and businesses. Reach him at 619-577-4002 or taylor@definefinancial.com.

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