Tuesday, June 5, 2012

Mortgages vs Rent

I’m 33 years old now and I’ve lived in five different homes that I purchased.  I started off living in a trailer that I bought for $5,000 when I was in the Army.  After the Army I purchased a condo right next to a supermarket and Wright State University where I went to school.  It was a great way to start our life outside of the military.  After college we purchased a larger home.  It is a 3 bedroom 2 bath home that I am renting out now.  I then purchased a house in Kentucky when I was a stock broker for Fidelity.  I lost about $15,000 after I got a new job back where I just left.  I am now living in my current home that I purchased close to my workplace. We have lived here for just over three years now.

Probably the biggest mistakes we made was when we bought houses.  I feel we messed up twofold.  A good rule of thumb is to not pay more than 2x your gross salary or income.  I failed in doing this for the condo and rental home (I should have rented).  I did get lucky buying and selling the condo.  Secondly, always get a mortgage with 15 or less years.  Lastly which we did is put down at least 20%. If you cannot do this, then you are better off renting, or finding a smaller home. My advice would be to get a smaller home that has the potential to be a great rental house. When you are ready to upgrade to a bigger place, then you rent out your old home.

Many times it is much more beneficial to rent than buy. For example my rental that I used to live in I bought for $140,000 and put $15,000 worth of upgrades. The house is currently being rented for $1,110. If you thought about purchasing this house with what I did and only put 3% down you might be looking at a monthly payment of $1,328.8 per month including mortgage, taxes, insurance, and maintenance. This renter is getting a lot of house for the amount they are paying.

Another advantage of renting is you have no debt, you are more flexible if you need to move.  Breaking a lease is easy if you are in the military.  If you get PCS orders, you give your orders to the landlord and off you go.  There are limited tax benefits contrary to popular believe when it comes to buying a house.  Unless you break all the rules I described about.  Buying a $300,000 house, putting 3% down, paying points, PMI, mortgage interest, and property tax.  Then you'll get a tax break.  It also can break your bank account.  Your goal shouldn’t be to get yourself into this kind of debt and convince yourself that you are smart because you are saving on some taxes.  There are much better ways to do that.  Besides…if you read my article who are you trying to impress, you should know that this is a big mistake. Thieves loves newer houses, and target them all the time.  Check the number of thefts in the neighborhood you are looking to buy or rent. You might be surprised!

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