How To Decide Whether To Buy Or Rent A Home

Squaw, Lake Tahoe

The rain thrashed our office windows hard one February Friday in San Francisco.  The weatherman encouraged us to stay in and avoid the roads if we could.  Most people would be glum, but not my friends and I.  Rain during the winter in SF means lots and lots of snow in Lake Tahoe!  My buddies and I decided to take a 2.5 hour drive up to Sugar Bowl and hit the slopes that Saturday.  A total of 2 feet of fluffy powder fell overnight and we were in snowboarding heaven!

When we returned that evening, our legs were sore but our faces beamed with smiles as we reminisced our daring jumps off of several of the steepest slopes.  We had no fear because the landing zone was soft.  The very next day in SF, the sun was beaming down a warm 76 degrees and we decided to play some tennis at the local park.  It was that exact moment when I knew that San Francisco was the place I wanted to live for as long as possible.  Months later I bought my first place.

BUYING A HOME IS NOT ABOUT THE MONEY

Knowing when to buy a home is not so much about one’s finances.  Everybody knows that you should follow my 30/30/3 home buying guideline where you have 30% of the value of the home saved up in cash, spend no more than 30% of your monthly gross income on the mortgage, and pay no more than 3X your annual gross salary for a home.  That is obvious.  You aren’t some horny teenager who can’t keep it in his or her pants and buy as soon as a bank says you can.  You’re a full-fledged adult who knows the basics of personal finance.

The most important factor in deciding whether you should buy a home is whether you love the environment you are in, and can see yourself living there for years.  In addition, you’ve found a career or entrepreneurial endeavor you enjoy.  Ask yourself this main question:  If you were forced to live in your current location for 10 years, would you be happy, OK, or frustrated?  If the answer is ‘happy’, you have yourself a winner.

HOME BUYING IS REALLY THAT SIMPLE

The key to wealth is simply being in the game for a long enough period of time.  Larry accumulated $5.7 million in his 401K because he invested for 35 consecutive years at his firm.  It’s the same thing with owning a home.  Thanks to inflation, and an ever increasing population, if you buy a house and live there for 20-30 years, you are most certainly going to come out fine.  And if nothing else, after 20-30 years, you’ll have a nice little asset to call home, where you can live rent free.

After three years of saving and investing all my money after college, I was sick of renting.  I didn’t want to spend more than $2,000/month on a nice one bedroom, and the rental stock really is inferior to the ownership stock here in San Francisco  There’s no point in making money if one doesn’t spend it on things that improve the quality of your life.

I knew very well after that glorious weekend that San Francisco was the place I could see myself living for the rest of my life.  I had already lived in five different countries, studied abroad in three others, and visited 23 more up until that point, and I just knew I had found myself a winner.  Nowhere combines the weather, job opportunities, culture, food, nightlife, and great outdoors like San Francisco.

LIFE IS HOW YOU LIVE IT

Deciding on buying a home is like deciding on a relationship or a marriage.  You just know at that point in time, s/he is the person you want to spend the rest of your life with.  If you are unhappy or uncertain with your career, haven’t explored enough places, and still don’t know what you want to do in life, renting is an absolutely fantastic choice.  If you do happen to know early on what you want to do and where you want to live, then by all means go for it.

Post updated as of 1/1/2014. We are in a rip roaring bull market in housing now!

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Regards,

Sam

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. cashflowmantra says

    Well, the ability to stay in one place is definitely a major source of real estate wealth building as is investing. I plan to do the same thing. We moved around quite a bit early on while still in school but built a house in 1995. We outgrew it with child number 6 in 2000 but have lived here since then. I plan on staying at least another 9 or 10 years minimum until all of the kids are moved out. My parents have only lived in 3 houses during my entire lifetime, the majority of which was the one I grew up in. They built it for $30,000 in 1973 and sold it about 5 years ago because my dad couldn’t take the stairs anymore.

  2. Darwin's Money says

    The ability to stay is huge; during boom times, nobody cared because you were making 10% a year on home value on a 0% down investment and companies were giving out relo packages. Those days are over. If you’re 95% sure you won’t have to move in the next 20 years, it probably makes sense to own over rent. If you’re just outta college and likely to move for better work every 5-10 years, you may want to rent early on until you figure it out. The transaction fees are staggering and the days of capital appreciation are virtually over. We’re in a double dip now.

    • Financial Samurai says

      I highly doubt we are in a double dip. With LinkedIn, Facebook, Twitter, Zynga all going public and with Apple doing very well, there is so much money out here chasing so few properties it’s ridiculous.

      Real estate is local, and I’m focused on the Bay Area. Is it that bad where you are?

      • Darwin's Money says

        In the US at large… major double dip. Case-Schiller index confirms that. With this social networking/Bay area bubble, it will just crash harder a few years out. Hold on to your hat! You don’t think you’re in a growing bubble?

        • Financial Samurai says

          Definitely a possibility, but there is real earnings this time around. So let’s say things collapse by 50% in two years, half of $100 billion in market cap value is still $50 billion more that wasn’t there in the first place. And if all of can cash out and sell to you guys not in the bay Area and buy real assets like property, we’re golden.

          It’s all relative.

  3. Andy says

    I’ve lived in PA just about my whole life and plan on living here forever. But this year I had to go to San Jose twice for work and that is the one place I could see myself moving to and being just as happy. I describe that whole area, to people who haven’t been there, as a paradise! If something at work ever opened up out there and I could transfer, I would in a heartbeat. I envy you.

    • Financial Samurai says

      Wow, a paradise huh?! It’s funny, because folks who live out here continue to look westward, to the paradise of Hawaii or Bora Bora! Everything is relative.

      What we do know is that most of us would never subject ourselves to the inclimate weather of the east coast. It’s just too rough and we’ve become soft.

      The job market really is booming here though, and therefore property prices have held up.

  4. Everyday Tips says

    When we bought our first home back in 1993, we strictly viewed renting as ‘throwing money away’. Housing prices had only gone up in my short time being an adult, and a house seemed almost like a guaranteed investment to people at our stage of life (and experience).

    I don’t love where I live by any means. We are stuck here because of family commitments. So, we make the best of it.

    Now that I am older, I don’t view a house as an investment anymore. However, I am glad we bought a house as opposed to renting the past 18 years.

    • Financial Samurai says

      A house is a home. IF it makes money, fine. If not, fine. A home is a house is a home! There is something priceless of claiming a property for your own.

      18 years later.. if you had rented, what would you have to show for it? I encourage people to buy once they have the 30/30/3 guide down, and know they plan to live in one area for 5-10+ years.

  5. retirebyforty says

    Our current home wasn’t a very good financial decision, but we love it here. We live in the city and there are so many things to do and the location is very convenient. Portland is right for us and we don’t mind investing in it. We’ll live here as long as we can afford it. ;)

    • Financial Samurai says

      I’ll have to visit you one day in Portland! Why are you at that World Domination Summit or something?

      Portland is such good value compared to the Bay ARea, it’s awesome! What are your state and sales taxes btw?

  6. Daniel Rosenhaus says

    The New York Times had a great interactive piece about buying or renting a home http://www.nytimes.com/interactive/business/buy-rent-calculator.html, it’s fun to play around with too. As for the question posed, I’m still too young to have made up my mind, so renting is where I’m at (though I see NYC as my home for life). But aside from the finances of buying a home, I see a home as a very emotional purchase. And while your finances dictate what kind of home you buy or rent, deciding everything else is purely emotional.

    • Financial Samurai says

      That’s why once you get the 30/30/3 rule down pat, finances don’t really matter b/c you are safe. You have to make that mental and emotional commitment. Once you do, I promise you it is one of the best feelings ever. It’s like plating an American flag in the ground and claiming it’s yours!

  7. Jeff @ Sustainable life blog says

    I still rent my home, and am working on getting my finances in order so that I can buy in the future. I’m glad that I rent at this point as well, as I was being pushed to buy after I graduated and resisted – soon after, the job I had lined up fell through, and I felt crappy enough with year lease hanging around my neck – I’m glad it wasn’t a 30 year note. I think the ability to stay in the same place is key. The reason that I’d like to buy were I am right now are family near by (but not too close), I’ve got a stable job, a great lifestyle, and friends and neighbors I enjoy being around. This area isn’t perfect, but then again if you’re looking for perfection you’re going to keep looking and not enjoy what you’ve got.

    • Financial Samurai says

      Good you didn’t buy right after college too. SO FEW recent grads know what they want to do immediately for 5-10 years. I would say less than 10% stay in the area for longer than 5 years. I wouldn’t get boggled down with a property for at least 3-4 years out of college if you can afford it!

  8. FinanceProfessor says

    I feel your guideline rule about 30/30/3 when buying a home is a very important piece of the puzzle when considering either the purchase or rental of a home. Like many have said earlier, the ability to stay long term in the house is of great importance to many folks, especially those who are beginning to start a family. While the thought of purchasing a home may seem unreasonable for many people, I believe the important part is to carefully plan and budget according to your income. The 30/30/3 rule provides a great way to build up a savings while comparing houses on the market, as well as a standard guide towards paying for the home over time down the road.

  9. krantcents says

    If I am going to live in an area for at least 5 years, I would buy a home. I would take a slightly different approach to your 30/30/3 though. Southern California housing is pretty expensive, however waiting to accumulate a 30% down payment may take too long. 20% is okay with me, but I would use 25% of monthly gross for the payment. 3 times salary in southern California would not get very much. I think you must be flexible with each factor, but adjust on the conservative side. My current home was purchased in 1997, for 2 times our salary at the time, but with 100% financing. The payment was less than renting equivalent space. Part of my 100% financing was my line of credit for the (20%) down payment. It was paid back in less than a year. I did not want to withdraw the cash.

    • Financial Samurai says

      Your timing of 1997 is lucky. I really don’t care where anybody lives… they should still do their best to stick to 30/30/3. That’s how people got in trouble, especially in southern California!

  10. Little House says

    My husband and I started looking into buying a house a couple of years ago. However, I’m glad that we weren’t ready financially; I’m not so sure I want to live where we currently live for another 10 years. We’re now exploring other possibilities north of us (but not as far as SF!) I’m tired of the traffic congestion and really want a more walkable, yet less crowded city. Of course, it will also depend on which districts will be hiring teachers within the next year. I’m glad that right now I’m flexible and mobile!

  11. Mortgage Nerd says

    Good article. A house is a home first and an investment second. Far too many people are still buying a house thinking that they are going to build a ton of equity in a few years and get rich. It only worked that way in the early 2000′s, which was an anomaly.

  12. JT says

    With labor now being more mobile than ever I’m starting to think that it makes sense to rent until you’ve come to a point at which you’re thinking about retirement. It is at that time that you can be the most sure you’re going to stay in the same place.

    I live in an area that doesn’t have a very big divide in quality of rental homes and owned homes, so I didn’t really take that into consideration. I can see where this could be a very big deal, especially in areas with higher population density. For families, school districts would be important, too.

  13. Untemplater says

    I’m helping my mom decide if she should sell her house, move into a smaller place and rent or just keep her house during retirement. Her house is way too big for her and it’s a lot of upkeep but I can’t see her living in an apartment. Hopefully we can find a way for her to keep her house. I need to check when she last did the big projects like replace the roof, water heater, ac, etc.

  14. MD says

    Wow this is the title of my new eBook! I love your thoughts and insights. All I wanted to add is that we all have a unique situation. Just because interest rates are low or because “experts” suggest that you buy a home, it doesn’t mean that it’s the right time for you.

  15. Forest says

    I always saying buying a home as an investment is a terrible idea but buying a home as a place to live is a great idea. I know you may disagree there but you get my point.

    San Fran sounds amazing and I really want to visit some time. Maybe one day i’ll live there!

    • Daniel Rosenhaus says

      I agree, I think buying a home is primarily a place to live. But because it can also be an investment, something you benefit from financially, that should be taken into account. Of course, if you do not care about its impact on your finances, then by all means, only think of it as a place to live. But it is not financially savvy to ignore the bottom line impact of real estate.

  16. Miss Moneypenniless says

    Here in London price, size, schools, neighbourhood, crime and proximity to transport networks are key in the decision. For a city where affluent neighbourhoods and, let’s say, more troublesome neighbourhoods lie directly next to each other, finding a house that is at once accessible and reasonably priced can be incredibly difficult. Your 30/30/3 hypothesis is also very interesting.

  17. Newlywed Bliss says

    We’re still deciding whether or not we’re going to keep renting or if we’ll bite the bullet and buy a house. Honestly, we’re not too concerned about owning a house until we’re ready to grow our family with a child. That’s when we’ll know that we’re ready to be in one place for a long period of time. Since we’re still young, renting is more ideal in case we want to go somewhere else.

  18. Kristoph says

    Hey,

    Nice article, and I like the 30% rule. I thought I’d comment that as an entrepreneur, I think of liability as either productive or counterproductive. If I’m using a room in my house as a base of operations for a home business and I’m making more money than my rent payments, then I have positive cash flow (and even get tax benefits). Then it makes sense to rent, because the room is a productive element.

    Renting is often viewed as “throwing money away” however, it’s also not great to tie up capital that could be used for more productive investments (or at least ones you can predict the outcome of better). Just my two cents! -Kristoph

    • Financial Samurai says

      Hi Kristoph,

      Good to hear from you man. I enjoy reading your article on Untemplater.com.

      Rent is absolutely fine, especially if one is mobile and has finite capital. If you are an entrepreneur, then by all means use your capital to fund your business!

      Cheers

  19. Aspiring Millionaire says

    I agree if you know where you want to live and buy with your rules it is great to own your own home. We have owned for 5 years and whilst I do not love my house or the area (I would prefer to be about 3 hours away in Canberra, not Sydney, but need to be in Sydney right now) I am glad we bought.

    We can do anything we like and our house would sell for about $100,000 more than we paid for it, which is a tidy profit. We plan on selling later this year, renting for a bit then buying where we want to live.

    Excellent post.

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