The decision to buy or rent a home is big one, especially if you've never purchased real state before. Here's my story about how I decided on buying a home vs renting. For me, the decision came up one rainy winter. Rain during the winter in San Francisco 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!
Fall In Love With A Gem Location
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.
Helpful Guideline On Buying A Home
This 30/30/3 guideline is:
- 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.
This should be obvious to those of you who know the basics of personal finance. If not, I encourage you to keep reading my articles regularly. The more knowledge you have on personal finance, the better your finances. Check out my top financial products page and sign up for free wealth management while you're at it.
The most important factor in deciding on buying a home is whether you love the environment you are in. You should be able to see yourself living there for years. In addition, you should have already 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.
Sick Of Renting? Time To Buy
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. Before that I had already lived in five different countries, studied abroad in three others, and visited 23 more up until that point. I just knew I had found myself a winner. Nowhere else has the great combination of comfortable weather, plentiful 6-figure 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.
Alternatively, if you do happen to know early on what you want to do for your career and where you want to live, then by all means go for it.
I strongly believe everybody should get neutral inflation by at least owning their primary residence. Real estate hedges against inflation and is a great forced savings account.
Wealth Building Recommendations
Before buying a home, make sure you are financially secure. The last thing you want is to get stuck in a mortgage you can't afford. Build your savings, save and invest for retirement, and protect your loved ones with life insurance. You want to make sure your family is financially secure and can pay your mortgage if anything happens to you.
Here are a few more wealth building recommendations you should consider.
Explore real estate crowdsourcing opportunities:
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible.
For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It's free to look.
Shop around for a mortgage:
Check the latest mortgage rates online through Credible. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. When banks compete, you win.
Updated for 2020 and beyond.