Should you buy or rent? If you’re wondering this, then you’re not alone. Paul Sydlansky, CFP®, dives into this discussion, a critical decision for those considering homeownership. He highlights the upfront and ongoing costs of homeownership, the process of building equity, and essential questions to ask when considering whether to buy or rent.

Topics Discussed:

• Upfront and ongoing costs of homeownership
• Building equity over time
• Questions to ask yourself

Transcript:

Hi, everybody. I’m Paul Sydlansky, and welcome to episode 21 of The Build, our 24 part planning series, where we take you through the life of building a plan with Lake Road Advisors. In today’s episode, we’re going to talk about the buy versus rent decision.

In the past, the American dream just made sense. Buying a home allows you to build equity and grow an asset where renting was often viewed as just throwing money away. We’re going to tell you today some of the things you really need to consider when making this decision. When buying a home, you need to consider a lot more of the associated costs, in addition to just the purchase price of the home.

First, the upfront costs. When you buy a home, there’s going to be closing costs, there’s going to be costs for painting the home, maybe fixing up a room, a bathroom, a bedroom, there’s also going to be moving costs, these are sunk costs and are going to add to the total amount that you pay upfront. Next, you’re going to have ongoing costs, like taxes, insurance, maintenance, and depending on what part of the country you live in, those taxes or those insurance costs can add up really quickly. So now you understand you have upfront costs, and you have ongoing costs.

Let’s talk a little bit more about building equity, this idea that your payment goes toward paying down your loan and growing your asset. Well, this is true, but unfortunately, what most people don’t realize is that it takes a long time to start building this equity. In the original first years of a 30 year mortgage, what’s going to happen is the majority of your payment is going to go toward interest. So in the first 234 years, you’re going to be paying down very little bit of that principal of the mortgage. This is why if you’re not sure that you want to stay in a certain area, or you may be leaving in a couple years, you really need to consider that renting might make more sense because the equity that you think you’re building is really not there. And then if you consider the closing costs, or the upfront costs that you incurred when purchasing the home, if you’re going to leave within two or three years, there’s going to be those closing costs when leaving, and that’s going to offset any equity gains that you may have made in that short period of time.

So what are the questions you should ask yourself when you think about does it make sense for us to buy? Will you live in this home for more than a couple years? Will you live in the home 5, 10, 15, 20 years? How long will it take for me to recoup closing costs? If we were to move in a few years generally, a rough estimate is about 5% of the total value of the home are going to be the closing costs that you incur. Could you grow into this home if you’re looking to grow your family? Does it make sense for you to grow into or do you have the ability to expand the home? And then finally, could you rent this home? We’ll talk about that more in next episode. But renting is another way that you can build equity. Unfortunately, that’s not always as easy and clear cut and we’ll talk about that, like I said the next episode, but do you even have the ability to do that with this home?

In conclusion, homeownership isn’t always a slam dunk. The buy versus rent decision has gotten really complicated, especially if you’re not sure if you’re going to stay in that city or town for more than a few years.

Join us next time in Episode 22 where we talk about owning a rental property and when it may or may not make sense for you and your family.

Lake Road Advisors (LRA) is a virtual wealth management firm headquartered in Corning, New York, with offices in Ithaca, NY and Portland, OR, founded by Paul Sydlansky, CFP in 2016 to provide financial planning for busy mid-career professionals with young families. LRA partners with couples long-term to build financial plans that allow them to live the life they want while preparing for the future by making smart money moves to grow their wealth. They can be reached by phone at the Corning, NY office at (607) 438-2914, Ithaca, NY office at (607) 463-8400, or Portland, OR office at (607) 292-2172 or at the firm’s website at https://lakeroadadvisors.com/

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.