If you’ve been to the grocery store, out to dinner, or had the luxury of enjoying some travel time, you know that inflation is real. According to global analyst Mish Talk CPI is reporting year-over-year inflation at 8.5% for March 2023. I think the cost of my bowl of Slow Churned Dreyers Ice Cream suggests it's higher–but we can agree, it's happening, it's real and it's hitting our pocket books.
So what can we do? If you can, stop paying rent and start paying a mortgage. In other words, buy a home or a condo. If you already pay a mortgage, consider taking on another (yes, even with today’s interest rates–more on that in Part Two). Of course, always buy responsibly–within budget, but let’s explore both options.First, let's look at buying, not renting. Before compiling in your head the reasons you will not qualify, just take a few minutes to call your favorite lender (or one of ours…just ask!). Yes, even if you have a 500 credit score, a bankruptcy and do not think you have a down payment source, just call. Don’t get a case of the “I can’t” before seeing if maybe you can. And, even if the lender’s answer is no, that just means “not right now”. It gives you the opportunity to get on the path to ownership–through things like proper credit management, strategic debt payment and other tools of the trade. These can help best position you when you are able to buy.
What if you can buy, but what you qualify for is not matching the vision in your head (side note: we hear this from first time buyers and multi-million dollar move-up buyers). For example, maybe you qualify for a 1 bedroom condo and that doesn’t match the three bedroom condo you decided while real estate daydreaming. My advice, don’t let the fact that it's not your dream home stop you from buying. Think about it another way. Maybe this home becomes your future “annuity”. You buy it, save up for another, and then let a renter pay this one off and help you save for retirement.
What if what you can buy is less than what you live in now? We offer similar advice. Don’t give up the benefits to your financial future just because what you buy may be less (bedrooms, square footage or backyard) than what you have now. Sometimes pairing down can be cathartic (who doesn’t benefit from some free therapy?). If you embrace the opportunity and remind yourself this doesn’t have to be your forever home, you can start enjoying a host of benefits that belong to owners. Here are just a few of them….
Owning a home or condo allows you to hedge against inflation. In inflationary times, rental rates rise. According to data provided by iproperty management, in 2022 the fair market rental for a 2 bedroom increased by over 13% from the year before. Anyone seeing a greater than 13% raise in their paycheck? Ouch. Even if you benefit from a rent controlled property in California, the landlord can still raise the rent by 5% + inflation (not to exceed 10%) for most covered properties.
If you buy a home, you can lock in a 30 year payment and landlord rental increases can be a thing of the past. Moreover, iproperty management reports that the average home saw an increase in equity in 2022 of over 18%. So, if you were an average homeowner last year you would have hedged against inflation, avoided a 13%+ rent increase and saw an average 18% increase in your home’s value. Seems like a good combo. While rates of inflation and equity can and do vary, historically, facts (and equity) are on your side. Who wouldn’t opt to buy a home at the prices enjoyed by our parents or grandparent’s?
If you rent a home, one thing is for sure, you will take a loss. Multiply the monthly rent X the number of years you rent and that money is gone. No equity growth. No debt paydown. Just gone. An average two bedroom condo in North Orange County can fetch nearly $3,000 a month in rent…that is a $36K loss per year. Stay for three years and it's over a $100K loss. Even if there was no appreciation in home value, you’d be better off buying. Debt would be paid down, housing payment would be stable and paid down debt would mean equity growth.
Tax benefits! We all love benefits (health care, 401(K), vision and dental). Bring them on! By buying a home, you can reap the benefits of additional tax deductions. Please see your tax advisor for details but both a new home purchase and “moving up” may allow you to itemize, write off your mortgage interest and add some benefits to your tax return’s bottom line! Who doesn’t want to reduce their tax burden (if you don’t, did you know your tax returns allow you to make an additional contribution…you are free to just hand over more money to Uncle Sam on a voluntary basis!)
We understand that each buyer faces their own unique financial situation. Yes, rates are high. Inflation and rental rates are higher. If they come down (did someone mention an election year?), you can refinance. If they don’t, you can still establish a fixed payment and scoop up the other benefits of owning.
Make home happen. It's good for you.