To Buy Or Not To Buy: The Million $ Question
In 1985, the average single-family home on Oahu rented for $1,000 a month. By 1995, the same home rented for $1,500 and today the average monthly rent for that home will run you $2,000. Tracking rents since 1970 indicate that Hawaii rental costs – which are some of the most expensive in the country – have nearly doubled every 20 years.
The question is, should you continue renting with the prospects of ever-increasing monthly rental fees or jump into home ownership now, while prices and mortgage rates are down? Whether you rent or buy your home, you can be sure that housing expenses will eat up a significant chunk of your paycheck every month. So it’s wise to take a good look at your personal situation and decide if renting or buying is best for you – it is one of those life decisions that may have an effect on your financial well being way down the road.
One of the primary benefits motivating renters to explore buying options is the ability to lock in a monthly payment for the next 30 years. And after 30 years of mortgage payments, the opportunity exists to live rent/mortgage free. Once the mortgage is paid off, all that’s left is to pay the taxes and insurance.
The first step a renter should take is to meet with a loan officer to get prequalified. But Jim Mao, Realtor and partner at Prudential Locations, says a quick way to get a ballpark idea of how much you can afford is to assume you can allocate 50 to 55 percent of your after-tax income for housing expenses.
“So for example, if your income is $65,000, then your gross monthly income is $5,416,” says Mao. “If you’re in the 35-percent tax bracket, your net income is $3,520 per month. If you used 50 percent of that for housing, it leaves $1,760 a month, which translates into a loan amount of $350,000 to $375,000. Add your down payment funds to that to get a realistic purchase price.”
With the economy in a slow recovery, it is a good time to be conservative, but not shortsighted.
“In any financial decision, there is a degree of risk,” says Mao. “The objective is to minimize that risk.
“One method in reducing risk is to take historical data and see if that follows some degree of trending,” he says. “In real estate we look at ‘leading indicators’ to detect trending. Currently, the level of inventory is down, the interest rate is down, the days on market is down and prices are leveling compared the last three years. These all point to recovery of the market. So yes, right now every day is a good day to buy real estate. Just make sure it meets your needs.”
One of the most popular reasons for investing in real estate is leverage. You can put 10 or 20 percent down, but you get to keep 100 percent of the appreciation.
Mao urges renters to think long term.
Real estate is a cyclical market. A record of prices dating back to 1959 shows ups and downs a normal part of each 7- to 10-year cycle.
“If you look at the price curve, even with the first depreciation period of 1991 through 1998, prices eventually came back by 2007,” says Mao.
Realistically, renting might seem like the best option at first. Fewer initial responsibilities, no down payment required, and no budgeting for repairs, are the upsides to renting. But many times, if you can afford to rent, you can afford to buy, once you compute the tax savings.
One of the less tangible benefits of homeownership is also one of the most impactful, according to Mao.
CLASSIC RENOVATED HOME in choice location close to beach and Kahala Mall. The 1,568 sq. ft. 3 bedroom, 2 bath includes open kitchen with subzero/wolf appliances including a wine chiller. The spacious living room and dining area open out to flagstone lanai and private courtyard. Amenities include hardwood floors, new carpeting, and recessed lighting. Gated for privacy, the 7,789 sq. ft. property includes a landscaped, walled yard perfect for kids or for a pool.
1992 my wife and I did our first load of laundry at midnight the first day we moved into our first townhouse in Aiea,” he says. “We looked at each other and were so happy – we felt good that we owned our home.
“I sincerely believe that everyone needs a nest, and having that nest provides you with the strength to deal with the challenges of daily living, and a way to provide stability for your children,” he says.
If you’re still renting, you owe it to yourself to look into the possibility of buying a home.
Wealth does not happen by accident. Financial planning is more important than ever right now. By taking a closer look at your financial affairs, especially budgeting for and managing debt, you can accomplish your goals and ultimately build a nest egg for your family and for retirement.
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