What makes renting a good investment?
You may all think now that renting a house or apartment is a waste of money and believe me I've been there. Have you ever heard any of the following saying?
"Money paid for rent is just putting money in the landlords pocket"
"Renting is throwing money out of the window"
"You don't build equity with renting hence it's not worth it"
Which would be true if it wasn't a few factors that can turn the table around .
Always check rent vs buy price ratio which gives you a quick indication where the market is trending.
This is the most obvious one. If renting is significantly cheaper than the cost of ownership you better off keep renting.
The usual rule of thumb is that roughly 5% represents the threshold below which is better to rent . Above that it's possibly worth looking into the options of buying.
Seattle has a 4.18% rent/buy ratio considering the average over the whole real estate market. Taking into other variables this means that you can be saving a lot buy not paying mortgage, property tax and maintenance on your own house.
If done right you can end up with over 5 million of equity at the end of the mortgage period compared to the 1.8 million that buying would give you. Making renting more lucrative by almost 3 times . So you can see this pretty quickly diminishes any of the statements above.
On the other hand there is Atlanta where the same ratio is over 7% making it rental prices relatively high compared to buying the same type, size, location house. Therefore it's more financially beneficial to buy if you can save up for the mortgage.
Buying is for long term
The longer you plan on holding to the house or apartment the better your chances are it will worth the investment.
This is another obvious one but surprisingly time, especially timeframe, is a frequently forgotten aspect when it comes to financial decisions.
If you move (and sell) every 3-5 years, buying is almost never going to worth it because in the first few years you mostly pay interest to the bank and don't build capital.
In the first year of your mortgage only about a third of the total payment will be spent on capital repayment and the rest will be interest. Meaning that instead of a landlord you're paying now for the bank. Plus you pay property tax and maintain the house you will move out from in a few years.
Another aspect if you're selling the house frequently is part of the appreciation will be taken by the capital gain tax.
Fluctuation and liquidity
Real estate is considered to be a conservative and stable investment. It always appreciates by time. However as we saw in the past it can have some serious swings during tough times. So the previous statement only stands true if you look at very long time lines. Talking about 10s of years.
And here comes liquidity. While stocks are also very volatile in times but they are significantly more liquid than real estate. You can sell them in the matter of minutes in most cases while selling a house might take months. So in case you would want to move out of your house during a downward swing in prices you may lose serious money or be stuck there for a few years before it bounces back.
By making smart investments your money works for you over time and that can have a serious impact on how much something worth.
If you're money doesn't just sit in the bank but being smartly invested let it be equity, bonds or any other alternative investments that yields more than a traditional saving account can make a huge difference whether you should consider renting or buying. As you can see in the calculator with only a few percentage point change in the investment can be a deal breaker between profitable rent or wasting your money. So make sure you read up on our other posts about how to make the most out of your investments.