By John Drachman
Since March you can add social distancing to an American Dream that includes a home with room to spare in a relatively Covid-free setting. According to a new Harris Poll, as reported in USA Today, nearly a third of pandemic-averse citizens are considering a move to less populated areas. “Space now means something more than square feet,” Harris Poll CEO John Gerzema said. “Already beset by high rents and clogged streets, the virus is now forcing urbanites to consider social distancing as a lifestyle.”
If working from home for many is here to stay, it might as well be a nice home. That’s according to Forbes’ Jack Kelly, who wrote, “The ability of people to be productive and remain in contact with the colleagues and managers worked so well that companies such as Morgan Stanley, JPMorgan and others have announced that they will continue this program.”
To buy or to rent?
Determining whether to buy or rent your suburban property starts with answering four questions:
- Do I plan to stay here awhile? To reduce your real estate investment risk, it’s important to stay in a house long enough to reduce your debt and hopefully create some price appreciation. Remaining in a location less than three years makes buying a home questionable. You’re better off renting.
- Do I view the real estate purchase primarily as an investment? Over the long term, putting too much of your savings into a single, leveraged investment like a home may be more risky than investing in a diversified investment portfolio of stocks and bonds. Buying more home than you need could leave you short in meeting other obligations. On the other hand, if you’re working out of your home and spending most of your time there, you will inevitably make improvements that could enhance the property.
- Isn’t paying rent like throwing money out the window? True, an investment property can appreciate. However, rent can be less costly than a mortgage payment after factoring in ownership expenses. You need to budget for the cost of property taxes, insurance, and regular maintenance.
- Isn’t the mortgage interest deduction always a win for the homeowner? Yes, generally. However, recent tax law changes have reduced the mortgage interest deduction in several ways. Also, over time, you’ll pay less interest and more principal – and gradually receive smaller deductions every year.
Looking at the metrics
Next, trying quantifying whether it’s better to plunk down money on a home with a mortgage or rent a property for the time being. A quick comparison can be accomplished through something called the price-to-rent ratio, calculated by dividing the home value by the annual rent amount. The rule of thumb goes like this: For similar properties, if the price-to- rent ratio is less than 20, buying might be a better option. If the ratio is greater than 20, renting might be better. Fidelity offers a nifty, free rent vs. buy calculator that shows the potential impact of your decision on long-term finances.
Do you want to know more? Consider contacting an investment or real estate professional to help you develop an action plan for determining whether you should buy or rent your next American Dream.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.