What many real estate brokers will tell you, is what you’ve probably already heard, “with that kind of budget, you should buy a property.”
And, you know what, they’re right. If you are paying $1000 or more a month in rent, you have a steady job and aren’t planning any drastic changes to your life in the next three or so years, then you are doing yourself a disservice by not buying a home.
Let me give you three good reasons why buying is a good idea:
One – You want to keep as much of your money as you can. If the U.S. government said they were going to take an additional 1/3 to 1/2 of your income every year, what would you do? You probably march on Washington with a pitchfork in your hand, right? Yet, many of us do that every month when we write a check to our landlord, we give our hard-earned money away, to someone else, for a roof over our heads. Crazy, isn’t it?
If you could, why wouldn’t you pay yourself that rent money? It sounds like a no-brainer. Think of it as a forced savings account, one that could be worth tens or hundreds of thousands of dollars upon the sale of your home.
In addition to this savings account, the IRS will let you deduct all of your mortgage interest from your income, every year, and I’m not afraid to tell you, I deduct nearly $10,000 of mortgage interest per year. That has allowed me a receive a substantial return from the IRS, every year. Plus, if you happen to pay mortgage insurance on your mortgage, you can deduct that as well.
Here’s to paying yourself!
Two – If you buy a house (and continue to make the payments), it’s yours! That’s right. There is security in that. You can set down roots in a place (this many not be good for folks who need to be able to pick up at a moments notice and go travel the world, but my neighbors did just that) You can plant vegetable roots, as in a garden, trees, a lawn, if you’d like.
You will no longer have a landlord telling you what color you can or can’t paint your bathroom, no building manager towing your car for not parking in the right parking space, in a house there is no neighbor above you, below you, sharing a wall with you, stinking up the hallway with pungent food or cigarette smoke. No bedbugs from the guy down the hall (this has become a real problem in recent years in the U.S. and worldwide). I’ll tell you, it’s liberating.
Home owners are more likely to be involved in their community, which means the neighborhood gets better over time. The children of home owners tend to do better in school, are more likely to be involved in extra-curricular school activities, and are more likely to attend (and graduate from) college.
Three – Housing prices tend to rise over time. This is an historical fact. In recorded history, in the U.S., property values have risen approximately 5% per year. This includes the time of the Great Depression and this recent Great Recession. At the very least, it is a hedge against inflation, but in some cases it can offer better returns than that.
Think back ten years of the Denver housing market and let’s look at only the Athmar Park neighborhood in Southwest Denver. If you had been fortunate enough (or savvy enough) to buy a home in this neighborhood in 2010, you would have paid about $205,000 and if you had bought last year, you would have paid about $330,000 (these are average prices folks). That is over $100K of increase in home prices in less than a decade! Of course the Highlands neighborhood is a wonderful exception, but what if you (or your REALTOR®) are savvy enough buy property in the next Highlands neighborhood?
Of course, moving past the idea of renting is difficult for many people and for a myriad of reasons. Sometimes, I think this is a difficult fact for us, as real estate professionals, to remember.
Here are the reasons why I think people are still shying away from buying into the housing market and then why these reasons just don’t make logical sense.
To paraphrase billionaire Warren Buffet when he summarizes his money making strategy,
“Where there is fear (in the market), I see opportunity.” This cannot ring more true than in the current real estate market because most potential buyers are just plain scared.
–It’s possible that with what people are hearing in the news, that they don’t believe they will be able to get a loan because banks just aren’t giving away money like they used to.
While this can be true of people with marginal credit, scores below 620, there are loan opportunities out there for people with decent credit. Banks are lending to more qualified buyers now than they have been in the past eight years!
I just talked to the in-house lender at Your Castle Real Estate and he told me that he is routinely able to lend to people with credit scores of 620 and above. 70% of the U.S. population has a credit score of 620 or above. Also, I just read an article in REALTOR® magazine that Wells Fargo, one of the biggest lenders in the country, has recently started a program where they can lend to people with credit scores of 500, as long as they can make a down payment of 10% of the home’s value! A 500 credit score is akin to spelling your name correctly on the college board exams.
–Perhaps people aren’t buying homes because they don’t feel like they have enough money for a down payment because most conventional wisdom about loans is that they are requiring up to 10-20% of purchase price.
Again, there are programs, most notably through institutions that deal in FHA loans, where the required down payment can be as low as 3.5%. There are conventional loan programs that offer down payments as low as 3%, and many others at 5%. Additionally, VA loans, for military personnel and veterans can finance up to 100% of a home’s value.
-Mostly, however, it is my opinion, that folks are still just plain scared of the real estate market. The media often reports of the horrible losses in home value that have occurred all around the country. Recently, the news has been referring to the Case-Schiller index of home prices and that those analysts are predicting even lower home prices in major metropolitan areas in the year to come. Scary stuff. The stuff of self-fullfulling prophecies.
This index is based on a 10-City or 20-City study area. When one examines which 20-City cities are cited, one finds Phoenix, AZ and Las Vegas, NV and Los Angeles, CA and Portland, OR and Detroit, MI. If these are the cities that Case-Schiller is basing their studies on, well of course things look like hell out there. If one examines the whys of these value drops in these cities, one will see huge industry declines over decades (Detroit); rampant, unsustainable growth (Las Vegas and Phoenix); widespread over-valuing of property (LA, Las Vegas, Phoenix); and continual unemployment, stretching back from before the recession (Portland, Detroit, Cleveland).
While there have were enormous losses in some cities and states during the 2008 crash and its aftermath, Denver, and Colorado as a whole, is not one of those markets. One of the reasons why the Denver market hasn’t suffered as badly as others is that there wasn’t a huge amount of speculation in this market driving prices up to unsustainable levels. This isn’t to say there was no speculation here, but there are many working-class neighborhoods in the metro area whose residents bought homes to live in, not to make a quick buck from.
Another contributing factor to Denver’s stability is our lower unemployment rate, as compared to other states. Our industries tend to be more stable and self-stustaining, agriculture, technology and services. Plus we have seen the inflow of new businesses and residents. While other cities saw declines in population, Denver saw increases.
So, if you are paying $1000 per month in rent, have a stable income stream, and a credit score of 620 or above, get in the game!
Here are a few more reasons why.
– The rental market in Denver has a very low vacancy rate, between 2% and 5%. The whys of this are complicated, but to simplify, more people are moving here, there is a segment of the population that has had to give up their homes to the bank (likely these folks won’t be able to buy again for several more years), and many other people are scared to buy. This means it will be more difficult to find good rentals and rents will be increasing. If you buy with a fixed-rate mortgage, your “rent” will not increase over the life of your mortgage term (as long as you avoid a variable-interest loan).
–Mortgage rates are still near the lowest they have been in 30 years. There are very few experts that believe mortgage rates will decrease more than they have, and almost all believe that rates will increase within the next year. If you are able to buy now, you will save yourself tens of thousands of dollars in interest over the life of your loan and qualify for tax deductions that you would not have if you were renting.
–Property values have been increasing over the past six years. This will not likely change dramatically in the next year, so if you wait another year to buy your home or investment property, you would have paid 8-15% more for a piece of property than you would have this year. Wait to follow the herd and pay more, or buy while everyone else waits and save yourself thousands.
If you wait and see what will happen with the market, you will pay more for a piece of property, you will have wasted more money on renting, and you will pay more in interest over the life of your mortgage as rates go up, and they will likely go up.
This is my educated opinion, but it’s also what I do, all day, every day. My goal is to help everyone I meet purchase a home, now, and by doing so, save themselves money, over renting, now. This same knowledge can be used by investors to make themselves money, both in the long-term and immediate through cash-flowing a property.