The American Dream…changing?

The view of the American dream is shifting. The generations before were “get a job, buy a house with a 30-year/15-year mortgage, work for 40+ years at that job while putting money in your 401K or IRA, retire, live off of your investments.” What about now?

The norm is shifting. We Millennials are changing jobs more than any generation before us. Are we discontent? Are we unable to make commitments? Are we apathetic and bore easily?

Though one could likely argue a case for some of these descriptions, from my experience and observation, it is more about control and freedom than anything else. We desire to maintain a grip on our direction and future in a way that staying in one location or with one company can [generally] not provide.

Is this a bad thing?

Maybe it depends on who you ask, but I would contend that it is absolutely not a bad thing! Are there benefits to staying with one job and one career your entire life? For sure! But this does not mean that job-hopping is detrimental to your future or career.

Something that has occurred because of this, though, is a decline in home-ownership among those 35 and younger.

It is because of this that I firmly believe in single-family home rentals as a viable business and investment strategy.

But let’s say that you aren’t looking to build a portfolio of rentals, does it still make sense to buy a place you don’t plan on staying long-term? The answer isn’t always so simple, but depending on a few details, I would still argue “yes” to usually buying over renting.

Now before anyone goes out, gets pre-approved, and purchases a home at the top of their approval amount, take in these few thoughts.

Take these few scenarios, and for my ease, let’s use the Midwest market where I currently live. Now home prices can vary greatly area to area, but we are going to examine a standard market for young professionals and families, Clintonville in Columbus, Ohio.

Average Home Price: $250,000 (3-bed, 1.5 bath)

Average Rent: $1600

Scenario 1:

  • 20% down payment
  • Interest Rate 4.35%
  • 30-year mortgage
  • Taxes – $4000 a year
  • Insurance – $700 a year

Scenario 2:

  • Renting
  • Security Deposit
  • 1st and last months rent

Scenario 3:

  • FHA loan of 3.5% down
  • Interest Rate 4.35%
  • 30-year mortgage
  • Taxes – $4000 a year
  • Insurance – $700 a year

Breakdown:

Scenario 1 2 3
Purchase Price  $ 250,000.00  $              –  $ 250,000.00
Mortgage/Rent Payment  $         995.00  $ 1,600.00  $     1,201.00
Money Down  $   50,000.00  $ 4,800.00  $     8,750.00
Insurance  $           58.00  $      12.00  $           58.00
Taxes  $         333.00  $         333.00
PMI  $                  –  $              –  $         197.00
Total Monthly Payments  $     1,386.00  $ 1,612.00  $     1,789.00
Total Money Down  $   50,000.00  $ 4,800.00  $     8,750.00

What you can see here is a couple different things. First, if you have the money saved up to have a down payment of that size (congratulations by the way!), your monthly payment could be almost $250 less per month than renting. But obviously that is not always feasible. BUT, if you take advantage of FHA financing, you can get into that same property for only a couple thousand more dollars and about $170 more in monthly payments.

But, what this doesn’t show is principal pay-down and appreciation in your property value.

When you are a renter, every penny you pay each month is gone forever – your landlord and/or insurance company get to keep it.

If, however, you own the home, part of your payment each month goes towards paying down the value of the loan. This coupled with appreciation can really accelerate your net worth.

There are many other factors and scenarios that could come into play, one of my favorites being “house-hacking,” a term coined by Brandon Turner over at BiggerPockets. The basics of “house-hacking” is renting out rooms (or if you purchased a multifamily, renting out other units) and thereby cutting or completely covering your monthly mortgage payments.

All of this aside, you need to weigh your market and desires prior to jumping into anything. This is just some food for thought – and please don’t hesitate to reach out if you want any explanations or advice!

What are your thoughts on renting vs buying?

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